Bid rigging is a form of fraud in which a commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid. This form of collusion is illegal in most countries. It is a form of price fixing and market allocation, often practiced where contracts are determined by a call for bids, for example in the case of government construction contracts.
Bid rigging almost always results in economic harm to the agency which is seeking the bids, and to the public, who ultimately bear the costs as taxpayers or consumers.
These are some very common bid rigging practices:
- Bid suppression occurs where some of the conspirators agree not to submit a bid so that another conspirator can win the contract.
- Complementary bidding, also known as cover bidding or courtesy bidding, occurs where some of the bidders agree to submit bids that are intended not to be successful, so that another conspirator can win the contract. For example, the cover bids might contain prices that are uncompetitive in relation to the prices submitted by the conspirator who is designated to win the contract, or alternatively, the cover bids might contain conditions that the conspirators know will be unacceptable to the agency calling for the bids.
- Bid rotation occurs where the bidders take turns being the designated successful bidder, for example, each conspirator is designated to be the successful bidder on certain contracts, with conspirators designated to win other contracts. This is a form of market allocation, where the conspirators allocate or apportion markets, products, customers or geographic territories among themselves, so that each will get a "fair share" of the total business, without having to truly compete with the others for that business.
- Phantom Bids are false bids taken by an auctioneer for the purpose of tricking a legitimate bidder into bidding more than he would have bid otherwise. The auctioneer hires Shills to call out the phantom bids. If the phantom bid is the winner, either the lot is hidden and comes back around for a second auction, or the 2nd-highest legitimate bidder is informed that the first bidder was unable to make payment.
- Buy-Back is the strategy whereby the auctioneer or seller bids on a lot and buys it back to protect it from being sold to the highest bidder for an insufficient price. This is fraud if the auction is advertised as an "Absolute Auction", meaning there are no reserve bids.
- Phantom auctions The Bank will 'tentatively' auction a foreclosed home, and give bidders an option to give "preliminary bids" for homes that are not yet authorized for auction. If the reserve bids are not met, the home will be updated as "never was available for auction" even though bids were received. Some houses will be auctioned at fire-sale prices and the auctions will be closed before the auction was formally announced. Investors rush to get in their preliminary bids before the house is technically up for auction. Bidders fear losing options so it causes irrational feeding frenzy in the bidders, bidding up the price far higher than normal. If bidders don't make the target bids, then the item was never available for auction. Banks do this because if they unloaded all their toxic assets at once, the housing market would collapse, so foreclosed homes are dribbled out with phantom auctions.
These forms of bid rigging are not mutually exclusive of one another, and two or more of these practices could occur at the same time. For example, if one member of the bidding ring is designated to win a particular contract, that bidder's conspirators could avoid winning either by not bidding ("bid suppression"), or by submitting a high bid ("cover bidding").
The typical objective of bid rigging is to enable the "winning" party to obtain contracts at uncompetitive prices (i.e., at higher prices if they are sellers, or lower prices if they are buyers). The other parties are compensated in various ways, for example, by cash payments, or by being designated to be the "winning" bidder on other contracts, or by an arrangement where some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves.
Bid rigging is an illegal practice under the criminal or competition laws of most developed countries. Depending on the jurisdiction, it is punishable by fines, imprisonment or both.
Bid rigging fraud can be resisted naturally by either side choosing to not participate in the auction. Bid rigging fraud by bidders can be resisted by auction houses by no longer putting items up for auction, punishing the crooked bidders. Bid rigging fraud by auction houses can be resisted by bidders who no longer bid, punishing crooked auction houses. An efficient free market auction where each side understands the terms and conditions, where deception is kept to a minimum, will result in a fair transaction price where willing buyers meet willing sellers. The temptation for one side to rig the bids for tremendous personal gain is always present. A solution is for each member to examine the auction for bid-rigging, and to make peers aware of any deceptions, so the offending party is punished with a lower payout as the other end of the transaction decides to go elsewhere.
In the United States, bid rigging is a felony criminal offense under Section 1 of the Sherman Act. Even so, bid rigging is still rampant in the construction industry, auto sale auctions, and foreclosed home auctions. In Canada, it is an indictable criminal offence under Section 47 of the Competition Act.
In the United Kingdom, individuals can be prosecuted criminally under the Enterprise Act 2002.
Although both a violation of Japanese criminal law and the Japan Anti-Monopoly Law, bid rigging is still a habitual practice of the Japanese construction industry. It has been shown by a number of academic studies both in Japan and in the USA to be a system which considerably inflates the cost of construction projects, and in the Japanese public sector, considerably wasteful of annual tax money amounting to billions of Japanese yen. The US Government, specifically the United States Trade Representative Office and Department of Commerce, made fierce efforts in the late 1980s and early 1990s to urge the Japanese government to scrap "Dango" as a de facto non-tariff barrier to foreign firms in the Japanese construction market. Despite years of negotiations, including promises by the Japanese government in the S.I.I. (Structural Impediment Initiative) trade talks, the practice was never fully stamped out and continued to flourish.
As of 2008 thirteen lawsuits were still pending over 1990s' bid rigging for local government contracts to supply incinerator plants.
- "US Department of Justice report". Usdoj.gov. 1994-09-16. Retrieved 2011-12-17.
- "New York Times report from 1995". Nytimes.com. 1995-03-09. Retrieved 2011-12-17.
- "Britanica Article". Britannica.com. Retrieved 2011-12-17.
- "Japan Times report". Search.japantimes.co.jp. 2009-03-28. Retrieved 2011-12-17.
- "Builders settle damages suit over bid-rigging | The Japan Times Online". Search.japantimes.co.jp. 2009-04-04. Retrieved 2011-12-17.