Collusion-proof mechanisms for full surplus extraction

Abstract

The paper examines information structures that can guarantee full surplus extraction via collusion-proof mechanisms. Our collusion-proofness notion requires that there does not exist any coalition whose manipulation can affect the mechanism designer's payoff. When the mechanism designer is restricted to using standard Bayesian mechanisms, we show that under almost every prior distribution of agents' types, there exist payoff structures under which there is no collusion-proof full surplus extracting mechanism. However, when ambiguous mechanisms are allowed, we provide a weak necessary and sufficient condition on the prior such that collusion-proof full surplus extraction can be guaranteed. Thus, the paper sheds light on how the collusion-proofness requirement resolves the full surplus extraction paradox of Crémer and McLean (1985, 1988) and how engineering ambiguity in mechanism rules restores the paradox.