Implicit Consumer Collusion in Auctions on the Internet

Most consumer-to-consumer Internet auctions are isomorphic to the English auction. Bids in these auctions are visible to all participants, and prices are always ascending. The success of these auctions have puzzled auction theorists because many of the procedures used in these auctions encourage collusion among buyers that leads to lower revenues for the seller and sometimes lower allocative efficiency of the auction outcomes. Using the institutional analysis approach and results from experiments, this paper attempts to explain why open ascending auctions have dominated the Internet auction landscape even though they might not be the most profitable alternative for sellers. Estimates of efficiency losses in these auctions due to implicit collusion among consumers are also provided.