On Ratifiability of Efficient Cartel Mechanisms in First-Price Auctions with Participation Costs and Information Leakage

This paper investigates whether an efficient all-inclusive cartel mechanism studied by McAfee and McMillan (1992) can still preserve its efficiency when bidders can update their information through the cartel’s collusive mechanism and there is a cost to participate in the seller’s auction within the independent private values setting. It is shown that, when the seller uses the first-price auction, the usual efficient cartel mechanisms will no longer be ratifiable in the presence of both participation costs and potential information leakage. The bidder with the highest value in the cartel will have incentive to betray, sending a credible signal of his high value and thus discouraging other bidders from participating in the seller’s auction. However, the cartel mechanisms would still be efficient if either participation cost or information leakage, but not both, is present.