Bid Rigging in a Competitive Market: What Should You Look For?

- April 4, 2014 6:30 AM
Categories: Commentary, Guest Post, Industry News, Perspective | Tags:

Spend Matters welcomes a guest post from Jim Kiser of GEP.

The act of bid rigging in a free market can have a very damaging effect to public enterprise.  Bid rigging can be linked to inflation, shaking the confidence of doing business between buyers and sellers and in general can factor into the erosion of a free market system.  Understanding anti-trust laws and how to apply them in situations when violations are identified, is a large benefit to helping law enforcement challenge the offenders.

The Sherman Act was put in place to prohibit suppliers in a competitive bid to fix prices.  Here are some of its key principles:

The Sherman Act outlaws “every contract, combination, or conspiracy in restraint of trade,” and any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” Long ago, the Supreme Court decided that the Sherman Act does not prohibit every restraint of trade, only those that are unreasonable. These include plain arrangements among competing individuals or businesses to fix prices, divide markets, or rig bids. These acts are “per se” violations of the Sherman Act; in other words, no defense or justification is allowed.

The penalties for violating the Sherman Act can be severe. Although most enforcement actions are civil, the Sherman Act is also a criminal law, and individuals and businesses that violate it may be prosecuted by the Department of Justice. Criminal prosecutions are typically limited to intentional and clear violations such as when competitors fix prices or rig bids. The Sherman Act imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.

See the Federal Trade Commission’s explanation of Antitrust Laws.

Price fixing is carried out in different ways.  Suppliers may agree to maintain a certain variation as to who is the lowest bidder for a contract. Or suppliers may drive prices up together adhering to higher prices that are above competitive market pricing.  Suppliers may agree to collectively agree to certain discounts or eliminate collectively all together. Suppliers may agree to stay near price differentials between different volumes.

Bid rigging also takes many forms, but bid-rigging conspiracies usually fall into one or more of the following categories:

Bid Suppression: In bid suppression schemes, one or more competitors who otherwise would be expected to bid, or who have previously bid, agree to refrain from bidding or withdraw a previously submitted bid so that the designated winning competitor’s bid will be accepted.

Complementary Bidding: Complementary bidding (also known as “cover” or “courtesy” bidding) occurs when some competitors agree to submit bids that either are too high to be accepted or contain special terms that will not be acceptable to the buyer. Such bids are not intended to secure the buyer’s acceptance, but are merely designed to give the appearance of genuine competitive bidding. Complementary bidding schemes are the most frequently occurring forms of bid rigging, and they defraud purchasers by creating the appearance of competition to conceal secretly inflated prices.

Bid Rotation: In bid rotation schemes, all conspirators submit bids but take turns being the low bidder. The terms of the rotation may vary; for example, competitors may take turns on contracts according to the size of the contract, allocating equal amounts to each conspirator or allocating volumes that correspond to the size of each conspirator company. A strict bid rotation pattern defies the law of chance and suggests collusion is taking place.

Subcontracting: Subcontracting arrangements are often part of a bid-rigging scheme. Competitors who agree not to bid or to submit a losing bid frequently receive subcontracts or supply contracts in exchange from the successful low bidder. In some schemes, a low bidder will agree to withdraw its bid in favor of the next low bidder in exchange for a lucrative subcontract that divides the illegally obtained higher price between them.

Market division or allocation schemes are agreements in which competitors divide markets among themselves. In such schemes, competing firms allocate specific customers or types of customers, products, or territories among themselves.

Almost all forms of bid-rigging schemes have one thing in common: an agreement among some or all of the bidders, which predetermines the winning bidder and limits or eliminates competition among the conspiring vendors.  It is very difficult to detect, however, suspicions may be heightened by strange bidding or pricing methods or even something a vendor says or does.

For more interesting thinking on procurement, visit the GEP Knowledge Bank.

Comments

  • Charles Dominick:

    Good article!

  • Alan Holland:

    I was struck by the title as it seems to be a contradiction in terms, surely the rigging renders the market anti- competitive?

    In terms of what to look for, the above symptoms are certainly indicative but are not definitive proof of anything untoward. The problem is of course enormous and has no easy fix but should we not be devising and promoting more intelligent market designs that deter rigging. Inverse game theory (or mechanism design) offers much hope in this area.

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