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

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: b A =60, b B =45, b C =30, b D =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.

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