Bidding Rings and the Design of Anti-collision
Measures for Auctions and Procurements
William E. Kovacic,
Robert C. Marshall,
Leslie M. Marx,
Matthew E. Raiff
Forthcoming in Handbook of Procurement, edited by N. Dimitri, G. Piga and G. Spagnolo, Cambridge University Press
Cartels and collusion
• Payoff to the suppression of rivalry
• Bid-rigging can be the focus
• Allocation scheme can be the focus—market share, geographic,
customer
 Industrial buyers will typically still run a competitive procurement
 At the micro level, bid-rigging will still occur
Auctions schemes (and procurements)
• Sealed bid
 First price
 Second price
• Open outcry
 English
 Dutch
Comparative susceptibility to collusion
• Non-cooperative bidder behavior contrasted to collusion
• Example: A:80, B:60, C:40, and D:20.
 Non-cooperative
• English: bid up to value
• First price: bA=60, bB=45, bC=30, bD=15
Comparative susceptibility to collusion (cont’d)
• Collusion
 English: suppress non-highest only
• Sustainable and robust to deviant behavior
 First price: suppress non-highest AND drop bid of highest
• Room for cheating by cartel members
Implication of comparison
Recommendation
When bidder collusion is a potential concern, use first-price
sealed bidding.
Information in losing bids
• Ring can monitor compliance
Recommendation
Auctioneer/procurer should not reveal losing bids when using
sealed bidding (both during and after).
Role of the auctioneer or procurer
• Concealing information about the object being sold or desired for
purchase is pro-collusive if bidders are asymmetrically informed
 “Winner’s curse” is a strong motivation for collusion
Recommendation
All information of relevance known to the auctioneer/procurer
about the item for sale/procurement should be revealed ex
ante to the entire bidding public.
Role of the auctioneer or procurer (cont’d)
• Auctioneer/procurer has strategic devices available to fight suspected
collusion
Recommendation
The auctioneer or procurement official should consider using
an aggressive reserve price policy to increase payoff and
simultaneously help deter collusion.
Role of the auctioneer or procurer (cont’d)
• The threat of shill bidders can be quite disruptive
 Much more so with sealed bidding than open bidding
Recommendation
To the extent possible, auctioneers/procurers should allow
bidders to submit multiple bids, with some under disguised
identities.
Role of the auctioneer or procurer (cont’d)
• A large sale or contract award offered at irregular time intervals can be
divisive to a ring
Recommendation
To the extent possible, auctioneers should hold auctions at
long, irregular time intervals.
Bidder collusion is facilitated with side-payments
• Cash transfers are often too transparent
• Inter-conspirator transactions at non-market prices
• Subcontracting can be just a transfer
Recommendation
Subcontracting can be pro-collusive. If possible, bid
solicitations should prohibit subcontracting by the awardee.
Avoid inadvertently helping the ring
• Cartel members want to monitor one another
• Some standard devices that are thought to help auctioneers and
procurers do the opposite
Recommendation
If the costs of switching suppliers are not very high, the
practice of offering “right of last refusal” should be avoided
since it is pro-collusive.
Avoid inadvertently helping the ring (cont’d)
• Beware of split awards
 Example: Procurement, two potential suppliers, each firm can make 2 units
and each have the same cost structure—first unit costs 5 and second unit
costs 100 to make.
 Sole award: buyer pays 105
 Split award possible: buyer pays 200
• “Insurance” of having second supplier can be expensive
• The bidding is non-cooperative, but potential suppliers can restrict
output ex ante to realize benefits of split awards
A good “tell”: Incentives of sales force
• Move from “seek market share” to “price before tonnage”
 A good “tell” of a conspiracy
 Look for refusal to bid or, alternatively, absurd bids
• More obvious with sealed bidding than open outcry
Price announcements as a pre-bid coordination device
• Many cartels have used price announcements to seek “acceptance” of a
price increase
Recommendation
For those conducting a private or public antitrust
investigation, analyze the communications used to implement
these price increases. Investigate if supply and demand
factors can explain the observed price increases or if time
elapsed between price announcements better explains the
observed price increases.
What else can an auctioneer/procurer do?
• Non-standard losing bids often reflect collusion
 Do not reflect costs
 Adjacent bids might be “too close”
Recommendation
Whenever possible, every aspect of the auction/procurement should be
documented, and the records should be retained for a long period. The
recording and documentation should include, but not be limited to,
announcement of the auction/procurement, who was invited to bid, who
actually bid, all discussions and conversations, and all bids. All bidders
should be notified ex ante that the entire record of all auctions/procurements
will be made available to public enforcement authorities and/or private
litigants should an investigation of collusive bidding occur.
Bidding Rings and the Design of Anti-collision
Measures for Auctions and Procurements
William E. Kovacic,
Robert C. Marshall,
Leslie M. Marx,
Matthew E. Raiff
Forthcoming in Handbook of Procurement, edited by N. Dimitri, G. Piga and G. Spagnolo, Cambridge University Press