Bribing and signaling in second price auctions, Games and Economic Behavior
We examine a specific form of collusive behavior in a 2-bidder, second-price auction (with independent private values). One bidder may bribe the other to commit to stay away from the auction (i.e., submit a bid of zero). First, we consider the situation where only a bribe of a fixed size may be offered. We show that there exist only two equilibria: one where bribing occurs with positive probability, and one where bribing does not occur. We show that an intuitive refinement of out-of-equilibrium beliefs rules out the no-bribe equilibrium. Second, we consider the case in which bribes of any size may be offered. We show that there is a unique equilibrium in continuous and weakly monotonic bribing strategies. In both setups (fixed or variable bribes) the bribing equilibrium leads to inefficient allocation of the good with positive probability.
Peter Eso, James Schummer
Eso, Peter, and James Schummer. 2004. Bribing and signaling in second price auctions. Games and Economic Behavior. 47(2): 299-324.