Economic Theory

, Volume 36, Issue 1, pp 57–80 | Cite as

A choice of auction format in seller cheating: a signaling game analysis

  • Takahiro Watanabe
  • Takehiko Yamato
Research Article


In this paper, we examine which auction format, first-price or second-price, a seller will choose when he can profitably cheat in a second price auction by observing all bids by possible buyers and submitting a shill bid as pretending to be a buyer. We model this choice of auction format in seller cheating as a signaling game in which the buyers may regard the selection of a second price auction by the seller as a signal that he is a shill bidder. By introducing trembling-hand perfectness as a refinement of signaling equilibrium, we find two possible strictly perfect signaling equilibria. One is a separating equilibrium in which a noncheating honest seller selects a first price auction and a cheating seller does a second price auction. In another pooling equilibrium, however, both cheating and non-cheating sellers select a second price auction. The conclusion that a seller chooses a second price auction even if he cannot cheat is in contrast to the previous literature, which focused on the case of independent values.


Auction Cheating Signaling game 

JEL Classification Numbers

C72 D44 D82 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bag P.K., Dinlersoz E.M., Wang R. (2000) More on phantom bidding. Econ Theory 15: 701–707CrossRefGoogle Scholar
  2. Banks J.S., Sobel J. (1987). Equilibrium selection in signaling games. Econometrica 55: 647–663CrossRefGoogle Scholar
  3. Chakraborty I., Kosmopoulou G. (2004). Auctions with shill bidding. Econ Theory 24: 271–287CrossRefGoogle Scholar
  4. Cho I.K., Kreps D. (1987). Signaling games and stable equilibria. Q J Econ 102: 179–221CrossRefGoogle Scholar
  5. Graham D.A., Marshall R.C., Richard J.-F. (1990). Phantom bidding against heterogeneous bidders. Econ Lett 32: 13–17CrossRefGoogle Scholar
  6. Grossman S.J., Perry M. (1986). Sequential bargaining under asymmetric information. J Econ Theory 39: 97–119CrossRefGoogle Scholar
  7. Iwasaki A., Yokoo M., Terada K. (2005). A robust open ascending-price multi-unit auction protocol against false-name bids. Decis Support Syst 39(1): 23–39CrossRefGoogle Scholar
  8. Krishna V. (2002). Auction Theory. New York, AcademicGoogle Scholar
  9. McAfee R.P., McMillan J. (1987). Auctions and bidding. J Econ Lit 25: 699–738Google Scholar
  10. Menezes F.M., Monteiro P.K. (2005). An Introduction to Auction Theory. Oxford, Oxford University PressGoogle Scholar
  11. Milgrom P., Weber R. (1982). A theory of auctions and competitive bidding. Econometrica 50: 1089–1122CrossRefGoogle Scholar
  12. Myerson R. (1981). Optimal auction design. Math Oper Res 6: 58–73CrossRefGoogle Scholar
  13. Okada A. (1981). On stability of perfect equilibrium points. Int J Game Theory 10: 67–73CrossRefGoogle Scholar
  14. Porter R., Shoham Y. (2005). On cheating in sealed-bid auctions. Decis Support Syst 39: 41–54CrossRefGoogle Scholar
  15. Rothkopf M.H., Harstad R.M. (1995). Two models of bid-taker cheating in Vickrey auctions. J Bus 68: 257–267CrossRefGoogle Scholar
  16. Rothkopf M.H., Teisberg T.J., Kahn E.P. (1990). Why are Vickrey auctions rare?. J Polit Econ 98: 94–109CrossRefGoogle Scholar
  17. Selten R. (1975). Reexamination of the perfectness concept for equilibrium points in extensive games. Int J Game Theory 4: 25–55CrossRefGoogle Scholar
  18. Vickrey W. (1961). Counterspeculation, auctions, and competitive sealed tenders. J Finance 16(1): 8–37CrossRefGoogle Scholar
  19. Watanabe, T., Yamato, T.: Cheating in second price auctions with affiliated values. In: Proceedings of IEEE Pacific Rim International Workshop on Electronic Commerce 2006, (forthcoming) (2006)Google Scholar
  20. Yokoo M., Sakurai Y., Matsubara S. (2001). Robust combinatorial auction protocol against false-name bids. Artif Intell J 130(2): 167–181CrossRefGoogle Scholar
  21. Yokoo M., Sakurai Y., Matsubara S. (2004). The effect of false-name bids in combinatorial auctions: new fraud in Internet auctions. Games Econ Behav 46(1): 174–188CrossRefGoogle Scholar
  22. Yokoo M., Sakurai Y., Matsubara S. (2005). Robust double auction protocol against false-name bids. Decis Support Syst 39(2): 241–252CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2007

Authors and Affiliations

  1. 1.Department of Business Administration, Graduate School of Social ScienceTokyo Metropolitan UniversityTokyoJapan
  2. 2.Department of Value and Decision Science, Graduate School of Decision Science and TechnologyTokyo Institute of TechnologyTokyoJapan
  3. 3.Department of Social Engineering, Graduate School of Decision Science and TechnologyTokyo Institute of TechnologyTokyoJapan

Personalised recommendations