Can Input Market Imperfection Prevent Collusion in Product License Auction?

Abstract

The paper considers a situation where government auctions a specific service provider license through sealed bid first price auction. There are at least three potential bidders in the market which differ in their willingness to pay for the license. The value of license to each firm is a private knowledge but all the values are drawn independently and identically from a common support which is a common knowledge. We model a two stage game. In stage 1, one of the bidders wins the auction and obtains the license. In stage 2, it purchases inputs required for producing the particular service which is then sold in the market. The paper shows that a firm always has the incentive to collude with the remaining bidders irrespective of whether the input market is perfect or imperfect. In the latter case the incentive diminishes in magnitude only. Lastly and contrasting to the popular perception, we show that presence of large number of bidders still provides an incentive to collude.