In April 2014, a former construction firm boss admitted to fraud that his firm had been involved in a systemic collusion scheme for provincial government contracts in Quebec for several years (globalpost.com, 2014). The network of bid rigging on infrastructure contracts had existed way long before Normand Bedard’s firm, Sintra, got involved when another boss informed him in 1986 of the equal division of procurement contracts in that region among three firms (globalpost.com, 2014). Such events are not isolated to Quebec but have also been occurring regularly in the United States government procurement auctions over the past several decades. The rest of this paper will examine collusion in the ...view middle of the document...
There were similarities in the market structure that were conducive to the formation and success of such cartel groups, an agreement among a group of “competitive” firms. Barjari and Ye (2003) came up with a set of conditions necessary for the distribution of bids to be rationalized as competitive bidding. Many cartel firms failed to meet the criteria. De Silva et al. (2008) discussed changes in the government procurement auction market that showed evidence of more competitive bidding resulting from the release of the seller’s valuation. While there is no definitive way to differentiate between a competitive and collusive bid, there are ways to lower the probability of collusion taking place in the market.
Section II explains the market structure. Section III reviews the identification of bid rigging in the auctions in various states based on the work of previous researchers. Section IV examines studies that have been conducted on the effects of changing the market structure on the presence of bid rigging. Section V provides concluding remarks.
II. The Market Structure
The first price sealed bid government procurement auction market conditions increase the probability of the formation of cartel firms. There are several key characteristics that make it conducive for collusive behavior. The first is that the Department of Transportation (DOT) publicly provides a plan buyer’s list. The DOT typically advertises highway construction projects to a list of subscribers (Porter and Zona, 1993). Those who are interested in bidding for the projects are required to purchase the plans from the DOT. The plan buyer’s list is a list of all of the firms who have bought the plan. This allows firms to know who their potential competitors are. Collusion is possible in this type of environment because cartel firms can potentially bribe their competitors, include them in the cartel, or crowd them out of the auction .
At the day of the letting, the day when all sealed bids are opened, the DOT publicly announces the winning bids and the bidders’ identity (Porter and Zona, 1993). The DOT auctions in some states have all sealed bids opened and the bids and identities of the bidders announced on the day of the letting. Such information makes it easy to detect deviation. If member firms were to undercut the previously decided upon agreement, it would be easy for the rest of the group to retaliate. Thus, the cartel member group remains strong.
There is also a large volume of contracts that are auctioned off on a regular basis. This allows for the possibility of a bid rotation scheme and a phantom-bidding scheme in which different firms take turns winning the auction. If the auctions were inconsistent and sparse, collusion would be less likely to form because there would be little incentive to give up the possibility of winning an auction for the illegal agreement that the conceded firm may possibly win the next one. The high frequency of bids makes it easy to fairly...