Economic Theory

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

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

Research Article

Abstract

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.

Keywords

Auction Cheating Signaling game 

JEL Classification Numbers

C72 D44 D82 

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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

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