Collusion and the Choice of Auction

Auctions are used in many different markets, including the leasing of a substantial fraction of the natural resources in the United States. The procedures used in the auctions conducted by the federal government have been a continuing source of controversy. One of the concerns has been the possibility of collusion among bidders. This article shows that cartels are stable if the seller uses open ascending-bid (oral) auctions, but not if he uses sealed high-bid auctions. This may help to explain the frequent use of sealed high-bid auctions.