Bidding Rings and the Design of Anti-collision Measures for Auctions and Procurements

1. 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

2. 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

3. Auctions schemes (and procurements) • Sealed bid • First price • Second price • Open outcry • English • Dutch

4. 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

5. 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

6. Implication of comparison

7. Information in losing bids • Ring can monitor compliance

8. 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

9. Role of the auctioneer or procurer (cont’d) • Auctioneer/procurer has strategic devices available to fight suspected collusion

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Price announcements as a pre-bid coordination device • Many cartels have used price announcements to seek “acceptance” of a price increase

17. What else can an auctioneer/procurer do? • Non-standard losing bids often reflect collusion • Do not reflect costs • Adjacent bids might be “too close”

18. 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