Bid Rigging
http://www.oft.gov.uk/news-and-updates/press/2009/114-09
The Office of Fair Trading in the United Kingdoms fined 129.2 million pounds on over one hundred construction firms that were found guilty for collusion on construction contracts. Many of the companies, admitting their violation before the court’s decision, got reduction for fines. This news revealed a kind of fraud in auctions. Bid rigging in this case, or collusion between companies that submit the bids, is the illegal behavior that works when competing companies conspire with each other to raise the price as government acquire the services from soliciting the bids. By deciding the winning bidder before the actual auction, companies that assume losing the auction in the beginning will submit complementary biddings, or cover biddings, whose prices are too high to be accepted. Thus the lowest bidder, though generally raising its price higher than the actual cost, will win the auction. Or in other cases, bidders would withdraw a submitted bid or stop bidding to let the designed bidder to win. The auctioneers ends up paying excessive amount of money from the taxpayers to the final winner of the auctions.
This kind of auctions in which sellers are the bidders to offer a price for service while commonly involving government is called procurement auction. The payoff for the bidder will be the price minus his true value, or in this case in cost of the construction. The pre-agreement between bidders allows the winning bidder to set the price higher than the true cost for the construction. The payoff thus will be very considerable. The idea of the all-pay auction can come into play as well. When companies know they are not winning, the time and energy spent on the bidding project will be limited, since the project is not meant to be competitive. The best way to keep the auction process fair and prevent this behavior of manipulating the auction result is to use a sealed-bid auction. As introduced in class, only the auctioneers in the game can see the bids from bidders in sealed-bid auctions. And due to this invisibility of bidding price, bidding rings formed by colluding parties can be broken when members of the rings don’t have the access to see each other’s bid, losing the ability to identify who actually break the agreement before auctions.
Valentina
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