Should we collude? Analyzing the benefits of bidder cooperation in online group-buying auctions

Abstract

Cooperation among bidders in traditional auctions is typically forbidden. This is because it is viewed as being harmful to the interests of sellers, who hope to obtain fair prices for their sale items. It also may be harmful to other bidders who are not able to take advantage of any cooperation that is occurring. In online group-buying auctions, in contrast to traditional auctions, cooperation results in higher welfare, leading to market expansion that benefits buyers and sellers, as well as the auction intermediary. This has not been well understood in prior research, however. In this article, we show how the online group-buying auction mechanism on the Internet can be effectively enhanced to produce higher welfare for the participants. The key to achieving this, we find, is for the auction intermediary to provide a means for bidders to cooperate, so as to collectively express greater demand. Such cooperation, it turns out, permits the group-buying auction mechanism to dominate the fixed-price mechanism from the seller’s point of view under some circumstances. Through an analytical modeling analysis, we offer insights into how sellers can set their group-buying auction price curves more effectively, so as to take advantage of bidder cooperation to improve auction performance. We further argue that the goal of the auction intermediary should be to offer an information sharing mechanism to facilitate bidding ring formation, as a means to maximize the value of this market mechanism.