Going once, going twice, reported!: cartel activity and the effectiveness of leniency programs in experimental auctions

We experimentally examine the effectiveness of a leniency program against bidding rings in two commonly used auctions: the English auction (EN) and the first-price sealed-bid auction (FPSB). Our results show that the leniency program does not affect the average winning bid, nor the average winning cartel bid. The program does deter cartel formation, but it makes cartels that do form more stable: subjects use the possibility to report the cartel as an additional stick to control cartel members. In fact, cartel defection is the sole reason for designated and non-designated winners to report the cartel. The results do not differ substantially across auction types although the deterrence effect of the leniency program is stronger in EN than in FPSB. At the same time we observe more defection from the cartel agreement in FPSB than in EN.

KEYWORDS: Leniency Programs; Auctions; Cartels; Laboratory Experiments
JEL CODES: C92; D44; L41