Bid Rigging - Explained
What is Bid Rigging?
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Table of ContentsWhat is Bid Rigging?How does Bid Rigging Work? Bid Rigging TypesBid Rigging ExampleAcademic Research on Bid Rigging
What is Bid Rigging?
Bid rigging is an unethical practise that occurs in the process of bidding, this is an act whereby businesses (competing parties) conspire with one another to execute non-competitive bids. In this situation, the competing parties conspire and choose a party to secure the contract using an uncompetitive bid. In most countries, bid-rigging is illegal as it violates the provisions of free-market competition and ultimately antitrust laws. Usually, prices in a rigged bidding process are higher than prices obtainable in a competitive and free-market process. Being an unethical act that thrives on collusion, bid rigging is often organized by corrupt officials of firms.
How does Bid Rigging Work?
In the United States, the antitrust law describes bid rigging s an illegal act, this is contained in the Sherman Antitrust Act of 1890. It is an offense that laws of many states frown against, the common punishments for bid-rigging are imprisonment, payment of fines or a combination of both. There are many forms of bid-rigging, but the common practise is one in which competing parties reach an agreement to allow one party to win the bid at raised prices. In some cases, however, bid-rigging can occur between subcontractors whereby a conspiracy is formed in order to submit a single bid at an inflated price.
Bid Rigging Types
Generally, bid-rigging can occur in car auctions, auction of properties, construction works, sale of homes and in government contracts. There are several types of bid-rigging, the most popular ones are;
- Bid Suppression: This is a case where some competing parties opt-out of a bidding process so that a party can win the bid.
- Phantom bidding where bidders are solicited to make higher bids than they ordinarily would.
- Bid rotation: entails taking of turns between bidders or competing parties.
- Buyback: A bid-rigging where a seller purchases the item being auctioned to avoid selling them at lower prices.
- Complementary bidding or courtesy bidding or cover bidding: in this type of bid-rigging, a particular bidder is selected to win the bid.
Bid Rigging Example
There are many real-life examples of bid-rigging, a common example is a bid-rigging that occurred in the 1950s in which competing parties conspired during secret meetings to select the bidder that would make the winning bid and the bidder that would make the losing bid. These bidders are rotated as all the parties get to win and lose bids. The conspiring parties were manufacturers of industrial products; General Electric and Westinghouse, there secret processes and conspiracy were later uncovered by the Tennessee Valley Authority.
Academic Research on Bid Rigging
- Detection ofbid riggingin procurement auctions, Porter, R. H., & Zona, J. D. (1993). Detection of bid rigging in procurement auctions.Journal of political economy,101(3), 518-538. This paper examines bidding in auctions for state highway construction contracts, in order to determine whether bid rigging occurred. Detection of collusion is possible because of limited participation in the collusive scheme. Collusion did not take the form of a bid rotation scheme. Instead, several ring members bid on most jobs. One was a serious bidder, and the others submitted phony higher bids. The bids of noncartel firms, as well as their rank distribution, were related to cost measures. In contrast, the rank distribution of higher cartel bids was unrelated to similar cost measures and differed from that of the low cartel bid.
- The use of criminal law remedies to deter and punish cartels and bid-rigging, Baker, D. I. (2000). The use of criminal law remedies to deter and punish cartels and bid-rigging.Geo. Wash. L. Rev.,69, 693.
- What is the effect of bid-rigging on prices?, Froeb, L. M., Koyak, R. A., & Werden, G. J. (1993). What is the effect of bid-rigging on prices?.Economics Letters,42(4), 419-423. This paper develops and applies a method for estimating the price effects of bid rigging and price fixing conspiracies. A fairly typical bid-rigging scheme is found to have raised prices by over 20% for over 4 years.
- The effect of bid rigging on prices: a study of the highway construction industry, Gupta, S. (2001). The effect of bid rigging on prices: a study of the highway construction industry.Review of Industrial Organization,19(4), 451-465. This paper examines the effect of multimarket contact in afirst price sealed bid government procurement auction market. It investigates whether bidprices in the highway construction industry are related to conditions that favor the formation of a cartel.Repeated contacts among firms are found to have a significantly positive effect on the winning low bidwhich leads to higher profit. Further, rivalry among few firms tends to exacerbate the multimarket effect.The results in this study additionally support the recent theoretical predictions that collusion isbetter sustainable during economic downturns.
- Proof of damages in construction industry bid-rigging cases, Howard, J. H., & Kaserman, D. (1989). Proof of damages in construction industry bid-rigging cases.Antitrust Bull.,34, 359.
- Auctions and corruption: An analysis of bid rigging by a corrupt auctioneer, Lengwiler, Y., & Wolfstetter, E. (2010). Auctions and corruption: An analysis of bid rigging by a corrupt auctioneer.Journal of Economic Dynamics and control,34(10), 1872-1892. In many auctions, the auctioneer is an agent of the seller. This invites corruption. We analyze a model in which the auctioneer orchestrates bid rigging by inviting a bidder to either lower or raise his bid, whichever is more profitable. The interplay between these two types of corruption gives rise to a complex bidding problem that we tackle with numerical methods. Our results indicate that corruption does not only redistribute surplus away from the seller, but also distorts efficiency. We furthermore explain why both, the auctioneer and bidders, have a vested interest in maintaining corruption.