(New Horizons in Competition Law and Economics) Stefan Weishaar-Cartels, Competition and Public Procurement - Law and Economics Approaches To Bid Rigging-Edward Elgar (2013) PDF

Cartels, Competition and Public Procurement
WEISHAAR 9780857936745 PRINT (M3109).indd i 28/03/2013 16:48

NEW HORIZONS IN COMPETITION LAW AND ECONOMICS
Series Editors: Steven D. Anderman, Department of Law, University of Essex, UK
and Rudolph J.R. Peritz, New York Law School, USA
This series has been created to provide research based analysis and discussion of the
appropriate role for economic thinking in the formulation of competition law and
policy. The books in the series will move beyond studies of the traditional role of
economics that of helping to define markets and assess market power to explore
the extent to which economic thinking can play a role in the formulation of legal
norms, such as abuse of a dominant position, restriction of competition and sub-
stantial impediments to or lessening of competition. This in many ways is the new
horizon of competition law policy.
US antitrust policy, influenced in its formative years by the Chicago School, has
already experienced an expansion of the role of economic thinking in its competi-
tion rules. Now the EU is committed to a greater role for economic thinking in its
Block Exemption Regulations and Modernisation package as well as possibly in its
reform of Article 102. Yet these developments still raise the issue of the extent to
which economics should be adopted in defining the public interest in competition
policy and what role economists should play in legal argument. The series will
provide a forum for research perspectives that are critical of an unduly expanded
role for economics as well as those that support its greater use.
Titles in the series include:
Microsoft on Trial
Legal and Economic Analysis of a Transatlantic Antitrust Case
Edited by Luca Rubini
Intellectual Property and Antitrust
A Comparative Economic Analysis of US and EU Law
Mariateresa Maggiolino
A Legal Theory of Economic Power
Implications for Social and Economic Development
Calixto Salomo Filho
Collective Dominance and Collusion
Parallelism in EU and US Competition Law
Marilena Filippelli
Cartels, Competition and Public Procurement
Law and Economics Approaches to Bid Rigging
Stefan E. Weishaar
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Cartels, Competition
and Public
Procurement
Law and Economics Approaches to
BidRigging
Stefan E. Weishaar
Associate Professor of Law and Economics, University of
Groningen, The Netherlands
NEW HORIZONS IN COMPETITION LAW AND ECONOMICS
Edward Elgar
Cheltenham, UK Northampton, MA, USA
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Stefan E. Weishaar 2013
All rights reserved. No part of this publication may be reproduced, stored in a

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04
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To my beloved wife and family
the source of my happiness and all inspiration
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WEISHAAR 9780857936745 PRINT (M3109).indd vi 28/03/2013 16:48
Contents
List of figures xi
List of tables xii
1. Introduction 1
1. Background 1
2. Research methodology and outline of the study 3
PART 1 ECONOMIC THEORY
2. Economic theory on optimal deterrence and enforcement 9

1. Introduction 9
2. Criminal versus administrative enforcement: error
costs 11
3. Private versus public enforcement 11
3. Industrial economics 14
1. Introduction 14
2. Historical overview 14
3. Economic models 21
3.1 A simple static monopoly model 21
3.2 Cartels 24
4. Industrial economic insights regarding bid rigging 28
4.1 Cartel formation 29
4.2 Cartel stability 33
4. Auction theory and collusion 36

1. Introduction 36
2. Auction formats and underlying assumptions 37
3. Lessons on collusion 41
3.1 Cartel formation 43
3.2 Cartel stability 55
4. Empirical findings 58
5. Concluding remarks 60
vii
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viii Cartels, competition and public procurement
PART 2 LEGAL ANALYSIS
Europe 65
5. The effectiveness of the legal regime applicable to bid rigging
in the European Union 66
1. Introduction 66
2. The legal framework applicable to bid rigging 66
2.1 Undertakings 67
2.2 Agreements 68
2.3 Object or effect 69
2.4 Effect on trade between Member States 71
2.5 Exemptions 72
3. Law and economics assessment 74
3.1 Introduction 74
3.2 Public enforcement 74
3.3 Private enforcement 85
4. Conclusion 87
6. Application of auction theory in Europe 89

1. Introduction 89
2. EU law and cartel formation 89
2.1 Winner determination and the distribution of
auction proceeds 89
2.2 New entries 94
2.3 The auctioneers response 96
2.4 Summary 102
3. EU law and cartel stability 104
3.1 Summary 107
4. Conclusion 107
China 109
in China 112
1. Introduction 112
2. The Anti-Unfair Competition Law 113
3. Anti-monopoly law in China 115
4. Penal Code 124
5. Public procurement laws 125
6. Conclusion 126
8. Application of auction theory in China 128

1. Introduction 128
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Contents ix
2. Chinese public procurement laws and cartel formation 128

2.1 Winner determination and the distribution of
auction proceeds 128
2.2 New entries 129
2.3 The auctioneers response 130
3. Chinese public procurement laws and cartel stability 133
4. Concluding remarks 135
Japan 137
in Japan 142
1. Introduction 142
2. The legal framework applicable to bid rigging in Japan 142
2.1 Tort law 143
2.2 Anti-monopoly law 144
2.3 Alternative legal measures 173
3. Conclusion 176
10. The Japanese construction sector 178

1. Introduction 178
2. Bid rigging in the construction industry 178
3. Japanese construction sector 184
3.1 Introduction 184
3.2 Labour, industry structure and prices 187
3.3 Subcontracting 191
3.4 Demand side 192
3.5 Debt burden in the industry 205
3.6 Concluding remarks 208
4. Conclusion 210
11. Limits of economic theories and concluding remarks 212
Appendix 1: Europe an overview of public procurement law 217

1. Introduction 217
2. The field of law 221
3. Applicability 222
3.1 Personal scope 222
3.2 Thresholds 226
3.3 Material scope 227
4. Substantive rules 228
4.1 Public procurement procedures and purchasing
formats 228
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x Cartels, competition and public procurement
4.2 Rules on advertising and transparency 232

4.3 Conduct of the procedure/eligibility for tender 236
4.4 Award of the contract 238
5. General rules 241
6. Procurement reform 241
Appendix 2: China an overview of public procurement law 243

1. Introduction 243
2. Field of law 244
3. Applicable law 244
3.1 Personal scope 245
3.2 Thresholds 245
3.3 Material scope 246
4. Substantive rules 246
4.1 Procurement procedures and purchasing formats 247
4.2 Rules on advertising and transparency 249
4.3 Eligibility of bidders 250
4.4 Award of the contract 252
5. General issues 253
Appendix 3: History of Japanese antitrust legislation 254

1. Introduction 254
2. Antitrust in the Occupation Era (194553) 255
2.1 The dissolution of control agencies 256
2.2 The Zaibatsu dissolution 1947 257
2.3 The anti-monopoly law of 1947 and the implications
of the road to 1953 258
3. Developments between 1954 and 1958 267
4. Antitrust legislation in the 1960s (195970) 273
5. Antitrust in the 1970s (197176) 278
6. The structural depression of 1977 and antitrust in the
1980s (197791) 288
6.1 The 1977 depression and the Depressed Industries
Law 288
6.2 The Industry Structure Law of 1983 and thereafter 291
7. Conclusion 294
References 296
Index 315
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Figures
3.1 The dead weight loss 22
4.1 Auction designs and cartel stability 52
9.1 Surcharge development 155
9.2 The JFTCs labour force and its budget 162
9.3 Cross-section comparison: GDP and staff 162
9.4 Cross-section comparison: GDP per staff 163
9.5 Investigators per formal action taken: a degree of activism 165
9.6 Formal actions and inflation 165
9.7 Formal actions as a percentage of cases completed 166
9.8 Decomposition of formal cases 167
10.1 Operating profit in the construction industry (2007) 185
10.2 Occupation in the construction sector 188
10.3 Construction work price deflator (2000 5 100) 189
10.4 Construction work price deflator change and inflation 190
10.5 Primary contracting (2007) 191
10.6 Total construction investment 193
10.7 Size of the construction sector and GDP 194
10.8 Public and private construction demand 194
10.9 Share of total expenditure of public entities in 2008 197
10.10 Big 50 and public construction expenditure 200
10.11 Housing and non-housing private sector investment 202
10.12 Big 50 share of total private investment 203
10.13 Bank dealing suspensions 205
10.14 Causes of bankruptcies 206
A3.1 Enforcement peak with trend line 295
xi
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Tables
4.1 Standard auction types 38
9.1 Post-reform surcharge levels 149
9.2 Surcharges for repeat offenders 149
9.3 Surcharges in respect of early termination offences 150
9.4 The current level of surcharges after the 2009 reform 154
9.5 Criminal cases 168
10.1 Size of firms in the construction sector 188
10.2 Number of licensed construction companies with annual
turnover exceeding 1 million yen 189
10.3 Change in public sector construction demand 196
10.4 Government expenditure allocation 198
A3.1 Outline of different anti-monopoly law revision bills and
proposals 281
xii
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1. Introduction
1. BACKGROUND
Well-organized public procurements have become more important in recent

years. In these times of tight public budget constraints, and in the presence
of increasing investment demand owing to the financial crisis, cost-effective
public procurements are a growing focus of attention. The Organisation
for Economic Co-operation and Development (OECD), the World Trade
Organization (WTO) and the European Union (EU), for example, are
promoting well-structured public procurement systems and competition
law regimes as being essential to foster economic prosperity and social wel-
fare.1 A central element of concern for public tenders involves bid rigging
conspiracies in other words, cartels. Bid rigging is frequently described as a
particular form of coordination between firms which can adversely affect the
outcome of any sale or purchasing process in which bids are submitted. For
example, firms may agree their bids in advance, or decide which firm will be the
lowest bidder. Alternatively, they may agree not to bid or to rotate their bids by
number or value of contracts.2
It bears mentioning, however, that such a conceptualization is by no

means ubiquitously used. In China, for example, bid rigging does not
only embrace collusion but also corruption; the concept is thus broader
than it is in other jurisdictions. For the purpose of this research, however,
bid rigging is considered to embrace only cartels and not corruption. Bid
riggings can take many forms but they can normally be classified as bid
suppression schemes, complementary (or courtesy) bidding, bid rotations
or subcontracting schemes.3
Cartels inflict a considerable cost upon societies by creating undue price
increases that translate into unsatisfied societal needs.4 Given the inherent
1See, for example, OECD (2009).

2European Commission (2002).
3 Attorney General, State of Connecticut (2009), 4.
4 This is generally referred to as a dead weight loss to society: see Martin
(1994), 28.
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2 Cartels, competition and public procurement
information asymmetry that characterizes violations in the area of compe-

tition law in general and cartels in particular, it is not surprising that exact
data on the size and extent of these societal costs is unavailable. Bearing
in mind that in most countries public procurement accounts for 15 to 20
per cent of the GDP5 and that bid rigging estimates suggest that prices
in the construction sector are strongly inflated (for example, by up to 30
per cent6 in the case of Japan), it can well be expected that societal costs
could indeed be very sizable and massive amounts of taxpayers money is
wasted.
Given the potential size of these costs to society, it is particularly lam-
entable that competition law and public procurement laws appear to have
developed, to a large degree, independently of each other. This may be
explained by examining the objects and purposes of the respective legal
fields. In addition to the attainment of particular societal objectives com-
petition law essentially seeks to regulate firms behaviour7 in the economic
field. It addresses conduct such as cartelization, abuse and control of
market concentrations. In contrast to this, public procurement rules seek
to regulate the way in which public bodies purchase. Public procurement
should be performed in a non-discriminatory and transparent manner
that gives rise to undistorted competition, thus allowing administration to
obtain best value for money. The functional overlap is confined to prohi-
bitions of bid rigging conspiracies that are recognized as problematic by
both legal fields. While competition authorities apply (industrial) econom-
ics insights to identify such conspiracies, public procurement authorities
frequently employ detailed comparative analysis of bid submissions to
identify violations.
This book addresses the relationship between public procurement law
and competition law in the area of bid rigging conspiracies from a law
and economics perspective. More specifically, it examines whether current
competition and public procurement legislation in the EU, China and
Japan deal effectively with bid rigging cartels and how economic theory
could be utilized to prevent such conspiracies. The book is therefore not
focusing on the ex post identification of cartels, but is rather seeking to
examine means to prevent their creation in the first place. In its assess-
ment it is also interested in pointing out the limits of the applied economic
theories.
5 European Commission (2004), 5.

6 USTR (2002), 9.
7 Though it bears mentioning that EU competition law, of course, extends
also to state behaviour and state aid.

Introduction 3
2. RESEARCH METHODOLOGY AND OUTLINE OF

THE STUDY
The dichotomy between the legal areas of public procurement law and
competition law does not appear to be extending into the area of eco-
nomics. In the economic sphere there are two different fields that can
be employed to address bid rigging conspiracies. Industrial economics
is used to analyse competition while auction theory addresses biddings
in a strongly analytical fashion. Although a direct link does not appear
to be formally established, the insights of industrial economics have
been applied in the framework of auction theoretic modelling. Before
elaborating upon the linkages between these fields, they will be briefly
introduced.
Industrial economics has a strong interest in the myriad of market struc-
tures found in the real world.8 As such, it is also concerned with govern-
ment policy regarding antitrust policy, regulation and public ownership,
as well as with the determinants of firm behaviour, scale and scope of busi-
ness organizations. While antitrust legislation is intrinsically normative,
industrial economics can be viewed as a positive9 complement to deter-
mine which outcomes are superior (that is, more desirable from a social
welfare point of view) in the presence of imperfect knowledge, product
differentiation, transaction costs, ownership integration, research, devel-
opment and innovation, and contractual relations such as tying, resale
price maintenance, franchising, exclusive dealing and joint ventures.10
In contrast to industrial economics that looks at the market as such,
auction theory has a more limited scope and focuses on bidder behaviour
during auctions. An auction can be understood as a set of rules which
translate information revealed by bidders into efficient outcomes by
means of an allocation and a payment rule. The challenge of auction
theory is to develop auction rules which are tailored to the preferences
of bidders in such a way as to provide Pareto optimal11 allocations.
Auctions do not only differ with regard to allocation and payment rules,
but also with respect to the amount of information they require bidders
8 See Shughart II (1990), 1.

9 For clarification of the distinction between positive and normative
approaches, the interested reader may be referred to Friedman (1953), 343.
10 Shughart II (1990), 1.
11 Pareto optimality describes situations in which it is impossible to make one
person better off without making at least someone worse off. In the absence of
side payments between bidders, Pareto-efficient but sub-optimal allocations may
occur.

to reveal. In the context of public biddings, auction theory can be used to

design auctions in such a way as to attain low prices.
From a functional perspective, both industrial economics and auction
theory are strongly complementary. While the former analyses cartels in
real-life markets, the latter deals with them in the specific situation of a
bid. It is therefore not surprising that only in-auction collusion can be
addressed through auction theory, while cartels that draw their stability
from long-established collaborations on the real market can be seen
as being beyond its reach. In order to address in-auction collusion,
auction theory benefits from basic industrial economic insights to design
optimal responses of auctioneers to destabilize cartels and to ensure
competition on the merits, which constitutes an important concept in
economics.
For the purpose of this study, three different legal systems have
been chosen (the EU, China and Japan) as a framework of analysis to
examine in which ways economic theory can be employed to prevent bid
rigging conspiracies. The jurisdictions have been selected on the following
grounds.
The EU has been included because it overhauled its public procure-
ment rules in 2004 and, despite its efforts to create a competitive internal
market, Member State government purchases remain a predominantly
national affair. The absence of sufficient competition from other Member
States necessitates particular attention to be placed on the detection of
cartels and optimal punishment. Since the EU does not have the ability
to employ criminal sanctions as a deterrence tool, it has to rely on admin-
istrative fines. These are inefficient if detection is low, the potential gains
from infringement are large and the fines that can actually be paid by
companies are limited. A close examination of a jurisdiction that has at
its disposal only limited legal tools to address bid rigging can be insight-
ful since it requires its tools to be designed well in order to influence firm
behaviour.
China has very recently promulgated its competition law and modern-
ized its public procurement legislation. Besides devoting some attention
to cartels, the legal rules have a strong focus on fighting corruption. Very
transparent procedures designed to satisfy the latter objective facilitate
cartel formation and operation. Its inclusion thus allows an examination
of the effectiveness of a legal system that has multiple objectives at the
same time.
For a number of years now, the Japanese Fair Trade Commission
(JFTC) has placed a strong enforcement focus on cartels. Of the 85 bid
rigging cases in which the JFTC took legal action during the (fiscal)
years 2002 to 2006, 66 were hosted in the construction sector (a stag-

Introduction 5
gering 78 per cent).12 Despite these enforcement successes, the legislator

felt the urge yet again to renew the Japanese anti-monopoly law and to
strengthen the legal tools available to counter such cartels. Japan can
rightly be viewed as the most active actor in addressing (bid rigging)
cartels and the approaches taken by Japan may contain important
lessons for other legal systems. The construction sector is examined more
closely.
Given the relative lack of data, auction theory is used to examine bid
rigging in the EU and China. This is carried out by means of an analysis
of the existing legislation. A theoretical law and economics analysis is con-
ducted, which examines on the basis of detection and optimal deterrence
the effectiveness of the legislation.
Bearing tribute to the degree of information required for conducting an
economic examination of a market, the Japanese construction sector has
been selected as a framework for industrial economics. Even though data
at the regional and local levels is not available via the central bureau of sta-
tistics, the available data still allows for a sound description of the industry
and the identification of factors that facilitate bid rigging conspiracies.
Given the different economic approaches employed, extrapolations
are to be qualified since a direct comparison of the findings is not pos-
sible. And yet the insights gained allow for an appreciation of the limits
of the economic tools employed. Similarly based on the theoretical
framework, it can be examined whether the competition and procure-
ment laws in the EU, China and Japan are effectively addressing bid
rigging conspiracies, in which ways economic theory can be employed,
and where its limits are.
The book is structured in two separate parts. The first is dedicated to
the description of economic theory; the second part applies the economic
theory from a law and economics perspective to the legal rules that
address bid rigging conspiracies in the three jurisdictions. Part 1 presents
first (in Chapter 2) the law and economic theory of optimal enforcement.
Chapter3 presents the field of industrial economics, which is applied in
Japan. The economic theory presented here constitutes the framework for
analysis and is presented in a less technical and more accessible fashion.
It is hoped that this makes this work accessible to a wider audience.
Chapter 4 presents auction theory that is applied to the EU and China.
Part 2 analyses the effectiveness of the legal frameworks that address
bid rigging conspiracies in the three jurisdictions. It examines in which
way they follow economic insights. Chapters 5 and 6 address the law in
12 OECD (2008), 67.

the European Union; the Chinese (Chapters 7 and 8) and Japanese laws
(Chapters 9 and 10) are then examined. A conclusion brings together the
outcomes from the preceding law and economics analysis and presents
some reflections on the limits of the applied economic theory.

PART 1
Economic theory

2. Economic theory on optimal
deterrence and enforcement
1. INTRODUCTION
This section of the book presents law and economics insights into optimal
deterrence and enforcement that are relevant for decisions taken by cartel
members. From a law and economics perspective it is submitted that law
essentially tries to set incentives (rules) so that people behave in a desir-
able manner. Economists are eager to provide the framework by which
to determine whether legislators and administrative authorities succeed
in setting incentives correctly so as to deter violations of the law in a
cost-efficient way. To explain how people behave in relation to incentive
structures created by law, Nobel Prize Laureate Gary Becker provides
a simple model, according to which the expected costs for the offender
should outweigh the potential benefits.1 According to this line of thought,
whether firms choose to engage in unlawful competition that restricts
activities depends on the associated costs of establishing and maintaining2
such practices and, of course, on the punishment incurred when found
guilty of violating existing competition laws. If firms are assumed to act
rationally,3 they will restrict competition when the total expected costs
(the sum of probability of detection multiplied with the sanction) are lower
than the anticipated benefits.4
1 Becker (1968), 169217.

2 Maintaining a cartel agreement can indeed be costly, since adherence cannot
normally be compelled by legal action. Retaliation schemes such as the basin point
systems create inherent instability if freight absorption and cross-hauling aggra-
vates relationships between participating firms. For a discussion of cartel stability,
see Martin (1994), Chapter 6.
3 The interested reader is referred to Becker (1962), 113, who shows that even
economic subjects acting irrationally may chose outcomes similar to those that
rational actors would have selected.
4 If not only institutions were punished but also the decision makers directly,
with sentences for which they cannot easily be compensated by the company, it
might be assumed that incentive structures may be skewed in favour of refraining
from illegal activity. One example is the threat of imprisonment as a form of legal

Effective enforcement policies thus deter violations if they increase

the cost to offenders sufficiently to make it not beneficial to trespass. In
Beckers model, expected costs are based on the level of punishment and
on the probability of detection, and an increase in either of those factors
would reduce the anticipated returns from engaging in illegal activity.
Comparing the cost-effectiveness of both possibilities as a means of crime
reduction, punishments are more efficient since they are considered to be
less costly, particularly if they take the form of fines.
Before elaborating further on the cost-effectiveness, it is worth men-
tioning that the benefits of punishments are not free from limitations.
Increasing punishments beyond the level where they serve marginal deter-
rence would render the whole punishment system inappropriate.5 Clearly,
there is increasing disutility associated with criminal activity,6 which
would imply that an appropriate level of deterrence should be maintained
in order to contain the more as well as the less serious crimes. Thus, a mere
increase in the level of punishment would be self-defying.7
Enforcement is generally associated with a cost to society. The optimal
enforcement, interpreted as minimizing social loss,8 depends on the costs
of catching and convicting offenders and the nature of the punishment.9
While some parts of the social loss are easily estimated, a large part of the
social disutility depends heavily on social choice. Thus estimation of the
optimal enforcement is not an easy task. Furthermore, Becker argues that
the more grave the offence, the higher should be the enforcement activity
and punishment to deter it from being committed.
Becker considers several forms of punishment and establishes that fines
are the most cost-effective means of punishment.10 Fines are relatively
cheap, easy to administer and have the additional advantage of raising
money for the treasury. Prison sanctions, by contrast, are viewed critically
by economists since they are costly to enforce, they limit the productive
capacity of society and may even have negative effects on rehabilitating
the inmates. While economists would thus generally favour fines over
liability of managers, rather than a monetary amount that could be reimbursed to

them by the company.
5 See Stigler (1970), 528.
6 At least if one assumes that there is diminishing marginal utility of income:
see Stigler (1970), 529.

7 Paraphrasing the above, if the penalty for petty theft was comparable to
that for bank robbery, the latter crime would be likely to be more frequent and,
consequently, the associated social costs would be higher.
8 See Becker (1968), 169217.
9 Issuing monetary fines is cheaper than imprisonment.
10 See Becker (1968), 169217.

Economic theory on optimal deterrence and enforcement 11
imprisonment,11 it should be remembered that the offenders ability to pay

is a precondition for effective deterrence. In those cases where a so-called
judgement proof problem arises and the (optimal) fine would be higher
than the individuals assets, a trade-off between increasing the probability
of detection and non-monetary sanctions albeit expensive will have to
be struck.
Law and economics offers insights not only into optimal deterrence but
also into the other goals of effective enforcement, such as the mitigation
of error costs. Error costs are of particular relevance in the context of
whether a fine or a prison sentence should be imposed. The costs of wrong-
fully convicting an innocent person are obviously lower when a fine is
imposed rather than a prison sentence. Law and economics offers insights
as to which body should impose fines and prison sentences.
2. CRIMINAL VERSUS ADMINISTRATIVE

ENFORCEMENT: ERROR COSTS
Administrative procedures are generally considered to be time-efficient,

and to incur limited costs, but since they do not involve impartial judges
nor are they based on a detailed investigation, error costs might be high.
Most legal systems therefore only allow for criminal law sanctions follow-
ing a criminal procedure with impartial prosecutors and judges; higher
burdens of proof are also generally required under criminal law. These
cost-inflating means of enforcement serve the purpose of convicting only
those who are truly guilty and thus ultimately a reduction in error costs.
It follows that when optimal deterrence would require the imposition of a
non-monetary penalty, criminal procedures should be used to ensure the
mitigation of error costs.
3. PRIVATE VERSUS PUBLIC ENFORCEMENT
Law and economics also offers insights into which actors should be
involved in the enforcement of the law.12 In economic literature it is gener-
ally argued that there is a role for public enforcement of competition law
to deter violations. The arguments put forward13 include the following:
11 See Polinsky and Shavell (1984), 98.

12 See, for example, Shavell (1993).
13 Van den Bergh and Faure (2011), 68.

1. Private parties may not even realize that they are harmed.
2. It is argued that the expected costs of private enforcement will often
exceed the benefits of a trial. This mismatch relates to difficulties in
proving damage and the causal relationships between the damage and
an antitrust infringement.
3. Private interests differ from societal interests. In taking a decision
whether or not to go to trial, private actors are considering only their
private costs and benefits but fail to consider the benefits to society
they would create by helping to enforce the law.
4. Victims have an incentive to wait for other victims to take costly
enforcement measures that will allow them to gain themselves without
committing their own resources. This is a typical example of a free-
rider problem.
5. Private enforcement may lead to potentially high error costs if judges
lack the necessary economic training and to a negative development
of competition law. In the area of alleged exclusionary practices, for
example, where private enforcement may be strong, judges without
the necessary economic expertise may fail to correctly draw the border
between competitive and anticompetitive practices.
In addition to the arguments that private enforcement may be inadequate

and thus public enforcement should be used, there are express arguments in
favour of public enforcement. Qualified authorities may have an informa-
tion advantage in detecting and proving antitrust infringements. Specialists
in economics and competition law will be handling the cases and can actively
monitor the markets in order to allow for the detection of violations.
After considering the difficulties relating to private enforcement and
why public enforcement is appealing, it should be mentioned that public
enforcement is not without its problems either. While there are situa-
tions where public authorities do have better information about how to
deal with antitrust infringements, there are also situations where private
actors possess better access to information.14 Furthermore, in situations
where the levels of fines foreseen by the legislator are limited and private
claims may lead to a significant increase in the expected costs of antitrust
violations,15 private enforcement is crucial. Last but not least, incentives
for officials to detect antitrust infringements and to adequately enforce the
law may also be sub-optimal as a result of the familiar problems associated
with civil servants.
14 See Di Frederico and Manzini (2004), 158.

15 Jones, C.A. (2004), 13.

Economic theory on optimal deterrence and enforcement 13
In light of the above, there is thus a strong argument from a law and
economics perspective to employ a combination of public and private
enforcement methods since neither method by itself appears to be capable
of safeguarding adequate law enforcement.

3. Industrial economics
1. INTRODUCTION
This chapter seeks to give a general introduction to the economic field dealing
with competition: industrial economics. The chapter is subdivided into three
interrelated parts. The first (in Section 2) introduces the field of industrial
economics. It reviews the Structure-Conduct-Performance paradigm and
presents some of the empirical findings regarding the link between industry
structure, barriers to entry and profitability of enterprises. In the course of
an historical overview, the Chicago School will be introduced before arriving
at the new industrial economics approach. The second part of the chapter
(Section 3) depicts the basic concept of the social welfare cost of a simple
static monopoly model and the economic concepts of cartelization, and
reviews their implications for the general public. Section 4 focuses specifi-
cally on the industrial economics insights regarding bid rigging conspiracies
and the lessons that public procurement entities can derive from them.
2. HISTORICAL OVERVIEW
This section will give a brief historical overview, dealing with both the
Structure-Conduct-Performance paradigm and the Chicago school of
thought, and will review relevant statistics.
The area of interest of industrial economics is the behaviour of firms
on their specific markets. It considers the study of firms policies towards
their rivals and customers and thus embraces prices, advertising, research
and development. As both competitive and less competitive firms are
examined, industrial economics is strongly related to microeconomics
and, in particular, price theory.1 While elementary courses of microeco-
nomics focus on simple market structure models of perfect competition
and monopolies, industrial economics has a strong focus on the myriad
of structures between these two extremes,2 and can thus be seen as being
1 Stigler (1968).
2 That is, if one would like to imagine a typology of market structures drawn
14

Industrial economics 15
particularly interested in market structures as found in the real world.3 As

such it is also concerned with government policy regarding competition,
regulation and public ownership, as well as with the determinants of firm
behaviour, scale and scope of business organizations.
While antitrust legislation is intrinsically normative, industrial econom-
ics can be viewed as a positive4 complement to determine which outcomes
are superior in the presence of imperfect knowledge, product differen-
tiation, transaction costs, ownership integration, research, development
and innovation, and contractual relations such as tying, resale price
maintenance, franchising, exclusive dealing and joint ventures.5 Perfect
competitive outcomes the state where social welfare6 is maximized7 are
frequently taken as a benchmark to measure the desirability of market out-
comes. Comparing welfare effects enables economists to give policy advice
on, for example, antitrust legislation and regulation and to determine the
effects of industry structure and business practices on social welfare.
At the root of industrial economics lies a methodological debate con-
cerning the relationship between theoretical and empirical analysis, which
even today gives rise to heated discussions.8 As a result of a growing dis-
satisfaction with the explanatory abilities of existing price theory, indus-
trial economists of the 1930s were inspired by the works of Chamberlain,
who linked price theory tightly to enterprise and the real economy that
is, to concentration, product differentiation and its legal side, to collusion,
trade practices and barriers to entry.9 Empirical analysis was put into
practice in order to supplement economic theory.10 Before Bains first
along a linear continuum between the two poles of perfect competition, implying
the maximum of consumer surplus, and a monopoly which can (but does not have
to) yield the largest possible producer surplus.
4 For a clarification of the distinction between positive and normative
approaches, see Friedman (1953), 343.

6 Defined as the state when individuals are collectively as well off as they
can possibly be that is, both allocative efficiency and productive efficiency are
established. Though it should be noted that this also involves some value state-
ments which are, however, less arbitrary than other normative criteria and are thus
appropriate for economic analysis.
7 See Debreu (1959).
8 For earlier accounts, see Morgan (1988).
9 Bain (1949), 130.
10 Masons work, rejecting the development of theory for its own sake without
proper empirical founding, is often regarded as being trendsetting in this discipline:

see Mason (1939).

industry cross-section analysis of 1956,11 case studies were common. In the

late 1960s and also in the 1970s, larger cross-section analysis of industry
data appeared, which was often based on governmental census bureau
data. The Structure-Conduct-Performance paradigm constituted the intel-
lectual framework of these analyses.12
The Structure-Conduct-Performance (S-C-P) paradigm13 relies on
observation of industries, institutional descriptions and metaphors that
link14 the industrys structural characteristics with the conduct of firms
and to economic performance. Structural determinants embrace the
number and size distribution of sellers, the number and size distribu-
tion of buyers, product differentiation, entry conditions, cost structures,
vertical integration and conglomerates. The conduct dimension consists
of pricing behaviour, product strategy, collusion, research and product,
as well as process innovation, advertising and legal tactics. Performance
indicators are the firms profitability, production and allocative effi-
ciency, dynamic efficiency (that is, the rate of technological progress),
employment and equity. While the linkages between the three elements15
structure, conduct, and performance are often considered to flow in
all directions,16 industry performance is often seen to be linked with its
structural determinants for it is assumed that a firms conduct is causally
related to industrial structure.
A particular focus of empirical research in the S-C-P context was on
the relationship between market structure, especially the degree of con-
centration, barriers to entry, and excessive prices and profits.17 Despite
considerable evidence for a weak positive relationship between profits and
concentration and a somewhat stronger relationship between profits and
entry barriers, not all analysis supports this finding. Studies conducted
regarding small open economic settings18 did not find support for this
relationship.19
Other critique of such a positive correlation of concentration, barriers
11 See Bain (1956). Bain describes the market structure and the performance
of large enterprises in 20 industries and analyses the relationship between industry

idiosyncrasies and differences in performance.
12 Martin (1993), 5.
13 Often referred to as the Harvard School of Industrial Economics.
14 See Bain (1959), 368, 295301, 31015.
15 Martin (1993), 8, speaks in this context of informal theoretical arguments
employed to link these elements.

16 Krouse (1990), 416.
17 See Weiss (1974).
18 See Pagoulatos and Sorensen (1976).
19 Mamuth (1993), 311.

to entry and price considers the use of accounting data, which is often used
as an input in profitability analysis. According to Fisher and McGowan,20
accounting profit is not equal to economic profit and is thus an imperfect
basis for measurement. Analysing industry data of 1953 to 1957 Brozen21
criticizes Bains hypothesis concerning the long-run equilibrium relation-
ship22 between concentration and profitability in Bains sample (1936
40).23 Comparing both results, Brozen concluded that the convergence
of above-average profits of concentrated industries and of below-average
profits of unconcentrated industries was attributable to a disequilibrium
situation of Bains sample.
As Martin24 correctly points out, since both authors share the absence
of independent tests for equilibrium situations of their data, either could
be mistaken. This example underlines the importance of independent tests
of the equilibrium or disequilibrium nature of the used data. Another
important criticism, often associated with Demsetz, of the positive rela-
tionship between concentration and profitability is based on the argument
that this relationship reflects the greater efficiency of large-scale opera-
tions25 and not the market power of larger firms.
Peltzman26 offers yet another explanation for the positive correlation
of profits and concentration. Examining 165 four-digit Standard Industry
Classification (SIC) industries between 1947 and 1967, he finds that cost
reductions were stronger in concentrated than in unconcentrated indus-
tries. Regressing changes in unit costs of concentrated markets and total
revenues on industry price indexes, he found that, even though not all cost
reduction was passed on to consumers, the net effect of concentration was
to reduce prices substantially. Hence profits rise when concentration rises,
not because prices increase, but because they fall more slowly than costs.27
20 Fisher and McGowan (1983).

21 Brozen (1971), 35169.
22 Brozen also questions Bains results on the basis of a sample bias in the
industry selection and on the basis of data bias from firm selection, in essence
entailing the efficiency critique postulated by Demsetz a couple of years later.
23 See Brozen (1971), 352.
24 Martin (1993), 462.
25 See the works of Demsetz (1973); (1974); (1976), but also Brozen (1971),
362, who arguably initiated the efficiency based critique.

26 See Peltzman (1977).
27 In critique of this, Scherer postulates that in many industries examined by
Peltzman, rising concentration was caused by product innovations (shift along the
average cost curve) rather than cost reduction innovation (shift in the average cost
curve): see Scherer (1979). Peltzman (1979) returns that a cost reduction was a cost
reduction.

A generally reversed opinion regarding the positive relationship between

concentration and prices is voiced by Shughart II,28 who claims that many
cross-section analyses use biased samples, which are confounded by highly
regulated industries.
Beginning with the studies of Comanor and Wilson29 and Collins and
Preston,30 industrial economists made use of extensive cross-section
samples of industry level data and analysed particular determinants of
firms profitability. Comanor and Wilson established that advertising
intensity has a stronger and more significant determinant of profitabil-
ity than market concentration has. The pricecost margin approach of
Collins and Preston showed that barriers to entry were lower for producer
goods industries than for consumer goods industries since product differ-
entiation was expectedly different between each sector. In addition to their
finding that product differentiation is an important basis for competitive
disadvantage, Collins and Preston showed that concentration raises price
cost margins only where small firms are at a competitive disadvantage.31
A third kind of econometric study is based on firm level data. This
allows the evaluation of changes in market share and its impact on market
performance. Such studies generally conclude that market share has a
stronger effect on the rate of return than does market concentration.32
The Structure-Conduct-Performance framework developed out of dis-
satisfaction with the theoretical limitations and mere descriptiveness of
price theory.33 Based on informal theoretical arguments, the relationship
between market structure, conduct and performance was tested by innu-
merous econometric analyses. Current research into industrial econom-
ics, theoretical and empirical, is not based on the S-C-P framework but
on formal models. Reasons to be identified are threefold. First, despite
the largely independent development of the S-C-P paradigm and formal
microeconomic analysis of imperfect markets, the evolution of both
fields was largely parallel. Second, as econometric modelling became
more sophisticated the structural dimension in the S-C-P framework was
treated exogenously; this made formal theoretical models, such as existed
within the realm of formal microeconomic analysis of imperfect markets,
fundamental for such structural equations. Third, the strong use of game
theory in oligopoly models gave industrial economists a formal tool with
28 Shughart II (1990), 95.

29 Comanor and Wilson (1967).
30 Collins and Preston (1969).
31 See also Martin (1994), 206 and Martin (1993), 468.
32 See Martin (1994), 212 ff.
33 This passage is based on Martin (1993), 8.

which to analyse strategic interactions to explain market performance.

Since oligopoly theory was now capable of answering the questions it was
unable to deal with in the 1940s, it replaced the S-C-P paradigm. The early
1970s to the early 1980s marked a golden age of theoretical development
in industrial economics. While empirical industrial economics and theo-
retical industrial economics were mutually enriching, divisions still exist.
Theorists are criticized for producing elegant models that are inapplicable
to the real world while empirically oriented industrial economists are
criticized for conducting analyses with unclear and ambiguous theoretical
foundation.
The industrial economics school that succeeded the S-C-P paradigm in
terms of influence on antitrust legislation in America is called the Chicago
School. Among the most prominent supporters rank industrial economists
such as Bork, Demsetz, Stigler and others, and jurists such as Posner.
Chicago School adherents have diverging opinions on several issues but
they also share common ground. Schmidt and Rittaler34 reduce the fun-
damental understanding of the Chicago School to three aspects. First, the
school views the market process as a free interaction of economic subjects,
without any governmental interference, as a game of the survival of the
fittest. Second, the role of the government or other public influence has
to be minimized and restricted to the mere setting of the legal framework.
Third, the school is often regarded as being liberal-conservative and in
favour of big business while being opposed to unions. Quite in contrast
to the S-C-P paradigm, which views imperfect competition as appropriate
to analyse the real world, Chicago regards perfect competition as having
more explanatory capabilities.35 As the long-run competitive equilibrium
model to explain real world behaviour is accepted, explanations involving
market power and imperfectly competitive markets are rejected.36 Chicago
is often criticized for being excessively theoretical37 and limiting its own
research to criticize studies of the S-C-P relationship.38
While the Chicago School achieved great influence in American politi-
cal and legal circles39 from the mid-1970s onwards, the claim that their
views dominate academic economics is questioned and is certainly untrue
34 See Rittaler and Schmidt (1990), xiii.

35 See Martin (1994), 9.
36 See Reader (1982), 15 ff.
37 Hildebrand (2002), 1512, claims that the Chicago School is too abstract,
overemphasizing economic theory and market forces, and merely emphasizing

allocative and productive efficiency while disregarding dynamic efficiency.
38 See Martin (1994), 11.
39 See Rittaler and Schmidt (1990), xi.

for the international debate.40 The schools appeal to the legal community
and policy makers alike is seen to rest upon its internally coherent ration-
ale and its capability to provide satisfactory answers without committing
decision makers to explicit value statements.41
Contemporary industrial economics is less driven by ideology. In con-
trast to the traditional industrial economics that was very much interested
in identifying determinants of market concentrations and presupposed
that industrial success factors (such as profits) were measurable, the focus
of the present research has changed. A new line of research, often referred
to as the new empirical industrial organization, addresses the so far
neglected question of whether market power can be measured in the first
place.42 Thus a central element of research is whether, and if so to what
extent, market power is present in an industry.43
Recognizing that data on costs is generally not available, econometric
models are used to infer market power (pricecost relationships) from
observable changes in the industry. By making express assumptions
about marginal costs (often assumed to be constant) and market demand,
one can infer a relationship between prices and costs in an industry
from observing how the equilibrium market demand and price levels
change over time. Data limitation may necessitate the estimation of cost
or demand functions, or the determination of equilibrium conditions.
Other models avoid express assumptions about marginal costs or market
demand and require only the estimation of a limited number of param-
eters. By observing the change in market demand and market price result-
ing from changes in factor prices (as a result of changes in the tax rate,
for example) market power can be inferred.44 Proving the actual existence
of market power is a non-trivial task and the new empirical industrial
organization has so far not succeeded in formulating generally applicable
solutions.45
Another branch of the new industrial economics employs game theory.
Game theoretic models often focus on imperfectly competitive markets
and their equilibrium and constitute a reformation of the empirical
research.46 They analyse the strategic behaviour of individuals and firms
in conflict situations to generate a conceptual understanding of their
40 See Martin (1993), 449, footnote 9 and elsewhere.

41 See Sullivan (1980), 1 ff, 9.
42 This section is partly based upon Knieps (2005), Chapter 6.2.
43 See Carlton and Perloff (2005), 27487.
44 See Knieps (2005), 136.
45 Knieps (2005), 137.
46 See Martin (1994), 12.

interactions and interdependencies.47 The difficulty of establishing, for

example, market power on the basis of game theoretic models is inherent
in the approach. There are a multitude of design choices that seem to be
valid to create a model.48 Furthermore, within a model there are often a set
of solutions which can be interpreted as equilibria. Game theoretic models
have been described as offering highly general findings49 and are criticized
for not yet offering sufficient guidance for competition policy makers.50
This is also the reason why game theoretic approaches are barely
discussed in the remainder of this chapter. Because of its subtle and intui-
tive appeal, the classical industrial economics is used as a framework for
analysis.
3. ECONOMIC MODELS
This part of the chapter will review economic concepts of monopolies and
cartels.51 The monopoly section below reviews a simple static model of
antitrust theory. Associated social welfare considerations will be intro-
duced. The social welfare implications of Cournot quantity setting and
Bertrant price setting oligopolies are examined in the passage on cartels.
The difficulties involved in creating cartels and cartel stability are then
considered.
3.1 A Simple Static Monopoly Model
A monopoly describes a market that is characterized by a single supplier52

and blocked market entry.53 As the sole supplier, a monopolys output
will have a bearing on the quantity demanded.54 Hence the monopolist
equates marginal revenue, the change in total revenue per unit change in
the quantity demanded, with the marginal costs of production in order to
47 Bester (2003), 4 ff.

48 The rules of the game and the number of repeated games are examples of
such design choices. See Carlton and Perloff (2005), 189 ff.
49 For a good survey on collusion, see Feuerstein (2005).
50 Knieps (2005), 142.
51 This section is largely based on standard industrial economics text books
such as Viscusi, Vernon and Harrington (1995), Martin (1993) and (1994), and
Krouse (1990).
52 In contrast to this, a market characterized by a single buyer is called a
monopsony.
53 This effectively rules out potential competition.
54 This is, of course, not the case for perfectly competitive settings.

Price
Income transfer to monopolist
Pm
Dead weight loss
Marginal cost
Pc
Qm Qc Quantity
Marginal revenue
Source: Based on Martin (1994), 28.
Figure 3.1 The dead weight loss
maximize profits.55 Assuming the presence of a linear demand function,

constant marginal costs and the inability of the monopolist to engage
in effective price discrimination, we can simplify reality to fit the model
presented in Figure 3.1.56
Monopolistic output will be restricted to Qm while price (Pm) lies
above the competitive level (Pc). Taking the perfect competitive output as
a benchmark, a part of what was formerly consumer surplus now accrues
to the monopolist. Whether this is socially desirable or not is inherently a
normative question and not the realm of economics. What, however, is of
fundamental interest to economics is the aggregated cost to society which
is derived from those consumers who would have bought the monopolists
produce at the perfect competitive price but are not able or willing to do
so at the increased price level. This cost of unsatisfied wants as a result of
output restriction is a measurable and welfare reducing cost to society. It
is known as dead weight loss (DWL).
The first empirical study was conducted by Harberger in 1954.57
Analysing the DWL58 for 73 industries, he estimated the negative
welfare effects to be 0.1 per cent of national income for the United
55 Frank (1997), 385 ff.

56 See Martin (1994), 28.
57 Hay and Morris (1991), 582.
58 Harberger used an equation to approximate the DWL depending on the rate
of return (r), revenue (price of the monopoly (Pm) and quantity of the monopoly

States. Critics of Harberger estimated the normal rate of return and

claimed that the use of average rates of return on capital would lead
to the inclusion of monopoly rents in the mean estimate and hence to
its overstatement. This in turn would lead to an underestimation of
economic profit on sales and thus to an underestimation of the dead
weight loss.59 Empirical estimates of dead weight losses in the Harberger
tradition depend crucially on the price elasticity of demand. The higher
the price elasticity of demand, the higher the dead weight loss associ-
ated with increases in prices. The arbitrary selection of a price elasticity
of demand of unity is thus questionable. Dead weight loss calculations
without price elasticity of demand60 estimate it to be as high as 50 per
cent of the monopoly profit and thus may constitute an upper limit for
the loss to society.
Firm level data, as used by Cowling and Mueller,61 is expected to cir-
cumvent the negative effect that unproductive firms have on the industry
mean, which is used in Harberger-like studies. Using firm level data of 734
US firms during the period 196366 and 103 UK firms during the period
196869, they find dead weight losses of 0.4 per cent of corporate prod-
ucts. Calculating two different dead weight losses one using Harbergers
estimate with a price elasticity of demand of unity, and the other by
assuming that the DWL is 50 per cent of the monopolistic proceeds they
find that the estimates without any reference to price elasticity are about
ten times as large as those in the Harberger tradition.
Other possible sources which are believed to increase the social welfare
costs of monopolies are derived from advertising, rent seeking62 and
X-inefficiency.63 While advertising may also be viewed as containing posi-
tive social benefits that potentially mitigate the adverse effect, rent seeking
is commonly viewed as increasing the dead weight loss by a multiple64 of
the expected monopolistic profit. A third cost of monopolies is generated
by the absence of competitive pressure, which is assumed to lead to all
(Qm) and price elasticity of demand (eQP) assumed to be equal to unity: Martin
(1994), 33 ff.
59 See Martin (1994), 35.
60 Ibid., 34.
61 See Cowling and Mueller (1978), 731.
62 Rent seeking is to be understood as the utilization of political processes in
order to generate economic rents that could not have been generated in ordinary
market transactions.
63 X-inefficiency is to be understood as the wasting of production inputs in the
process of production.
64 Depending on the number of actors involved: see Cullis and Jones (1998),
293 ff on rent seeking.

sorts of allocative inefficiencies. Scherer65 believes that the X-inefficiency

could be as large as 1 per cent of the national product. Overall it appears
that dead weight losses could be around 2 per cent of national income.66
3.2 Cartels
Unlike monopolists, in real life many entrepreneurs recognize their

interdependence with other market participants.67 Models describing
the behaviour of oligopolies generally can be distinguished between two
categories: one regarding output setting models; the other regarding
price setting models. Industries which cannot flexibly adjust production
schemes as a result of significant sunk costs (such as the car industry) are
accurately described by the former category. Industries that set a price
and sell as much as they can (the insurance industry, for example) are
accurately described by the latter.68
If a firm considers its rivals output levels when taking production deci-
sions, it can assume that its rivals will maintain constant output.69 In the
so-called Cournot duopoly model each firm assumes that its rivals will
maintain their current levels of output.70 Hence production decisions are
based on the residual market demand. Since all entrepreneurs are assumed
to have the same production and decision criteria, their production deci-
sions are symmetric and lead to a stable equilibrium in the long run.71 The
interdependence between market participants in a situation where output
decisions are imperfectly coordinated, Cournot competition causes the
market price to be lower and the total quantity produced to be higher than
would be the case under a monopoly.
Extending the Cournot duopoly model to allow for a larger number of
firms, the long-run outcome is driven down towards competitive equilib-
rium levels.72 This is particularly true if firms are of equal size. If they are
65 See Scherer (1980).

66 See Mamuth (1993), 318.
67 See Viscusi, Vernon and Harrington (1995), 102.
68 Ibid., 102.
69 The Cournot duopoly model assumes constant marginal costs and the
absence of fixed costs. The duopoly model can be extended to a larger number of
firms with analogous outcomes.
70 Bester (2003), 77.
71 Even if we assume an oligopoly with a dominant position and a fringe firm,
recognition of interaction will lead to a stable equilibrium. This stable Cournot

market equilibrium will, of course, only be stable if one firm decides to produce
less than the level that would prevail under a perfectly competitive setting.
72 Hay and Morris (1991), 72 ff.

not of equal size73 and the industry becomes more concentrated,74 firms
will be able to exert (some) market power and raise prices. The ability of
dominant firms to restrict output and raise prices depends on barriers to
market entry and the violent nature of smaller competitors75 to success-
fully challenge such attempts. But generally speaking, market concentra-
tion is associated with market power. While this certainly exacerbates the
negative effects on social welfare, it should be noted that Cournot com-
petitors are unable to maximize joint profits. This is owing to their failure
to take into account the negative effect of an additional unit produced on
their competitors revenue. It is the recognition of this failure that gives
rise to incentives to collude.
In contrast to Cournot, Bertrand assumed that firms would not compete
as much on quantity produced but on prices. Hence Bertrand models
emphasize product differentiation and price, rather than market concen-
tration and quantity produced, as being crucial determinants of market
performance.76 Producers are assumed to make pricing decisions and sell
as much as they can.77 If products are homogeneous, a minimal price dif-
ference will lead to the capturing of the entire market. The outcome is thus
necessarily the same as it is under perfect competition.78
The more products are differentiated, the less elastic is the demand
curve around the industrys price average. For completely differentiated
products, demand for each product is close to the market demand curve,
and firms can realize profits similar to those of monopolists. However,
the more similar the products, the closer the profits are to those of the
competitive outcome.79
Whichever model of oligopoly is used to describe a given industry, the
73 Reasons for this may be a difference in costs. This would imply that the firm
with the lower costs produces more than the higher-cost firms. See Martin (1994),
123.
74 Market concentration is often measured by the Herfindahl index. What
should be noticed, however, is that even highly concentrated markets can lead to
very competitive outcomes in the presence of fierce rivalry. This can be the case
if production and development decisions cannot be adjusted flexibly and involve
considerable sunk costs.
75 Of particular importance is not so much the act of challenging the dominant
firm, but rather the belief of the dominant firm that rival firms will challenge it.
The percentage change in competitors output that a firm expects in response to
a 1 per cent change in its own output is called conjectural variation. See Hay and
Morris (1991), 62.
76 Bester (2003), 95.
77 Viscusi, Vernon and Harrington (1995), 102.
78 Bester (2003), 106.
79 This passage is based on Martin (1994), 135.

inherent problem of failure to reach joint profit maximizing production

outcomes creates incentives to collude. In the following section, the deter-
minants of collusion will be considered.80
The mere realization of interdependence and the recognition that the
profits of every firm could be increased by restricting joint output is not
enough for collusion. There are several factors to be born in mind. A
firms control over price depends on market concentration, the degree of
rivalry, and on product differentiation in the market; furthermore, collud-
ing parties have to agree on how they are to reach profit maximization (see
Section 4.1 below).81
If negotiations are costly, reaching an agreement will be difficult.
Costs will increase the more participants there are in the market.
Therefore, the higher the concentration of an industry, the easier it
may be to reach agreement.82 Differentiated products, particularly in
the presence of changing market demand,83 make it difficult for firms
to agree on the necessary means to reach joint profit maximization.
Similarly, different cost structures84 complicate reaching an agreement.
This will be the case if joint profit maximization necessitates a reduction
in production of firms with a higher cost structure. This is exacerbated
if the influence of high-cost firms on the cartel depends on its market
share. Different inter-temporal preferences,85 as indicated by different
discount rates of present and future profits, will make it difficult to reach
an agreement, since the desired outcomes for joint profit maximization
differ. Furthermore, competition laws generally forbid overt collusion.
The costs of collusion and differences in risk averseness may make it dif-
ficult to reach agreement. Collusion can be reached by firms engaging in
price leadership, a form of signalling, and by applying generally known
pricing rules.86
Yet, even if collusion is reached, the inherent problem of any such
agreement is stability. As long as price exceeds marginal cost, firms have
an incentive to increase output to increase profits. Since every firm has
this incentive, cartels are inherently unstable. In an inter-temporal setting,
80 See Hay and Morris (1991), 75 ff.

82 High concentration indices suggest that there are fewer large market partici-
pants who need to agree. While this facilitates collusion, this does not imply that
concentrated markets do not reach competitive outcomes.
83 Martin (1994), 155.
84 Viscusi, Vernon and Harrington (1995), 119 ff.
85 See Martin (1994), 155.
86 Ibid., Chapter 6.

cartel stability depends on the discount rate of future income. Discount

rates must be low enough firms must value future profits sufficiently
highly to outweigh the short-term profits to be realized from withdrawing
from the cartel agreement.87 In such situations cartel agreements would be
beneficial.
Maintaining an agreement on the profit maximizing strategy is easier
if there are effective sanctioning mechanisms to enforce cooperation.
Excess capacity may indeed lead to such a situation.88 It lends credibil-
ity to the fear that defecting from the cartel agreement will reduce the
anticipated future profits to competitive levels. Furthermore, vertical
integration can allow suppliers to effectively undermine cartel agree-
ments concluded in the supplying industry. Vertical integrated suppli-
ers89 can sell a product at the agreed price to their downstream entity,
but since the true cost remains the production cost of the supplier,
the downstream entity can undercut the prices of its competitors. An
increase in the market share and output of the vertically integrated entity
reduces the demand of its competitors in the cartelized industry. Thus
vertical integration has negative repercussions on the stability of the
cartel agreement.
The effectiveness of such sanctioning mechanisms depends heavily
on the inter-temporal preferences of the firms (the discount rate) and
on the probability of detection. Concentrated industries find it easier
to maintain agreements.90 This is based on the fact that they are more
likely to notice changes in industry output. Since they stand to lose more
from a violation of the cartel agreement, they have greater incentives to
monitor compliance. Detection is easier if sales volatility and changes
in customers are relatively low and if sales occur frequently. Detection
will also be easier if government agencies publish the bidding results of
offers received. Another way to facilitate detection involves external
organizations which accumulate information about the industry without
being directly involved in production, such as trade organizations. A firm
may be reluctant to reveal sensitive information to its rivals but may be
willing to pass on information to a trade organization which monitors the
market.
87 The underlying assumption here is, of course, that competitors do not

engage in a second collusive agreement once they have been betrayed.
88 See Martin (1994), 167.
89 Ibid., 166.
90 This passage is based on Martin (1994), Chapter 6.

4. INDUSTRIAL ECONOMIC INSIGHTS

REGARDING BID RIGGING
As already indicated above, the new industrial economics provides
interesting analysis of the strategic behaviour of individuals and firms in
conflict situations and furthers our understanding of their interactions
and interdependencies.91 Since it is criticized for not yet offering sufficient
guidance for competition policy makers,92 this section does not follow the
game theory-based new industrial economics, but presents critical issues
that have been identified in a classical industrial economics framework to
prevent collusion and thus bid rigging conspiracies.
While industrial economics helps us to understand how collusion
works and which factors facilitate collusion, it is only of limited practi-
cal value in detecting actual collusion.93 Merely establishing that a set
of factors that facilitate collusion is present in a given industry does
not allow us to draw the conclusion that illicit conduct is actually being
practised.
A complicating factor in establishing whether violations have been
occurring is that competition law enforcement agencies suffer from a
substantial degree of information asymmetry. In order to prove whether
or not illicit conduct is at work, one needs to know the exact demand and
cost functions of the market actors it goes without saying that these are
not available to enforcement agencies and that enterprises may always
try to reason their way out of any alleged charges. While an exact test for
collusion remains beyond the reach of industrial economics, it still helps
us to identify the determinants of collusion. Once these determinants
are present in a market, particular measures should be taken to obstruct
potential collusion. The analysis thereby takes an ex ante viewpoint asking
the question when collusion is likely to occur rather than an ex post view
to determine whether it has been occurring in the past.
This section focuses on two important issues: cartel formation and
cartel stability. Both dimensions are crucial for the establishment and
operation of a successful bid rigging cartel. Determinants that facilitate
cartel formation and cartel stability are presented below. If these factors
are found to be present in a market or an industry, this would suggest that
preventive measures to undermine collusion should be taken to obstruct
bid rigging conspiracies in the framework of public tenders.
91 Bester (2003), 4 ff.

92 Knieps (2005), 142.
93 Feuerstein (2005), 187.

4.1 Cartel Formation
Significant efforts have been made by economists to explain in which

circumstances undertakings are able to form cartels. Yet, before directly
addressing cartel formation, a few general remarks are given in order to
set the framework of analysis and to prevent misunderstandings. While
jurists distinguish cartels from collusion (the latter does not require a
formal agreement), economists are more concerned with the societal
effects and employ these terms interchangeably. Collusion in the parlance
of economists and in this chapter refers to any form of agreement
between firms that has the object or effect of raising or fixing prices and
of reducing output in order to increase profits. Adam Smith observed that
people of the same trade seldom meet together, even for merriment and
diversion, but the conversation ends in a conspiracy against the public, or
in some contrivance to raise prices.94 As indicated by this citation, the
welfare effects to society that stem from collusion are indeed negative, and
in real life many entrepreneurs recognize their interdependence with other
market participants.95
Industrial economics theory suggests that the mere realization of (large)
undertakings interdependence and the recognition that the profits of
every firm could be increased by restricting joint output is not enough to
collude. There are several factors that determine the ability of undertak-
ings to form cartels. As was mentioned in Section 3.2 above, the ability of
undertakings to control prices and thus to collude depends on (1) market
concentration, (2) the degree of rivalry, and (3) product differentiation in
the market. Furthermore, colluding parties have to (4) agree on how they
reach profit maximization.96 Each of these is discussed in turn.
(1) Market concentration It is frequently suggested97 that if indus-

tries are concentrated it is easier to reach a cartel agreement.98
The intuition behind this is that negotiations are generally not
94 Smith (1937) (original dates back to 1776).

95 See Viscusi, Vernon and Harrington (1995), 102.
97 It is worth mentioning that within the framework of game theoretic
approaches to the new industrial economics this perspective has been called into
question. Dick (1996) and Symeonidis (2003) produce evidence where concentra-
tion does not make collusive agreements more likely.
98 High concentration indices suggest that there are fewer large market partici-
pants who need to agree. While this facilitates collusion, this does not imply that
concentrated markets do not reach competitive outcomes.

without cost and the more market actors have to be consulted, the
more cumbersome it is to reach a viable and mutually beneficial
agreement. Thus, in the presence of negotiation costs, the more
concentrated an industry, the easier it is to create a cartel. In addi-
tion to the increased difficulty of coordinating a cartel when the
number of market actors is large, the higher the number of cartel
members that will have to be included will also imply that each
cartel member will receive a smaller amount of the cartel proceeds.
With declining cartel revenue per member, the benefits of cartel
membership also decline and hence the incentives to adhere to the
cartel agreement.
(2) The degree of rivalry If industries are very competitive and rivalry
between the undertakings is fierce, it may be expected to be more
difficult to build the required degree of trust and comfort to achieve
a mutually beneficial agreement. While the determinants of rivalry
may depend upon a multitude of factors, one element that merits
particular attention from an economic perspective is repeated inter-
action. It is expected that competitors are more likely to agree to
cooperate if they expect a (higher) number of repeated interactions in
the future.
(3) Product differentiation Differentiated products, particularly in the
presence of changing market demand,99 make it difficult for firms
to agree on the necessary means to reach joint profit maximiza-
tion because, in the eyes of the consumer, products are not perfect
substitutes. If market demand changes, the cartel must adapt output
quickly to the changes in consumer preference. It is thus expected
to be difficult for a cartel to decide upon the right product mix that
maximizes its joint profits.
(4) Agreement on profit maximization There are a number of factors
that make joined profit maximization difficult to agree upon. Cartel
members will always have an incentive to cheat upon the other cartel
members.
If the cartel members operate under different cost structures100
reaching an agreement is difficult. This will be the case if joint profit
maximization necessitates reduced production in firms with a higher
cost structure or if high-cost structure firms have to accept that
more efficient firms should be receiving a larger share of the cartel
proceeds. This is even more exacerbated if the influence of high-
99 Martin (1994), 155.

100 Viscusi, Vernon and Harrington (1995), 119 ff.

cost firms on the cartel depends on its market share. A reduction

in market shares or in production capacity in turn will endanger
that companys future competitive position and hence will consti-
tute an important impediment to the cartels profit maximization.
Competitors that demonstrate a strong asymmetry in cost structures
or market shares may therefore find it more difficult to form a cartel
excluding competitors from a cartel may in turn limit the cartels
profitability, so the determination of cartel membership is not a
trivial task.
Similarly, different inter-temporal preferences,101 as indicated by
different discount rates of present and future profits, will make it
difficult to reach agreement, since the desired outcomes for joint
profit maximization differ. Future market developments also play
a crucial role in the ability of competitors to form a cartel. Growing
markets make it more attractive for competitors to collude since the
expected gains from cooperation will increase in the future, provided,
of course, that the barriers to entry a precondition for being able to
price above competitive levels and for attaining cartel proceeds are
such that new entrants are not cannibalizing on the cartels proceeds.
Furthermore, competition laws generally forbid overt collusion. The
costs of collusion and differences in risk averseness may make it dif-
ficult to reach agreement.
In addition to the above-mentioned difficulties there are a number of strat-

egies that can be employed to establish and operate a cartel. Operating
rules are particularly important since they need to be transparent and
flexible enough for the cartel to adapt to changes in the market (such
as technology advances, changes in consumer preferences, and supply
shocks). Collusion can be reached, for example, by firms engaging in price
leadership, and by applying generally known pricing rules or signalling
their intended behaviour to competitors.102 Very complex pricing rules
have, for example, taken the phases of the moon as a basis for determin-
ing the cartels pricing policy it goes without saying that it does require
an extremely inquisitive investigators mind to detect and prove such
schemes.
Most of the issues raised above under the industrial economics treat-
ment are elements describing industry structure that facilitate cartel
formation. Whether collusion is actually at work cannot be determined as
101 See Martin (1994), 155.

102 Ibid., Chapter 6.

such but, in the presence of facilitating factors, procuring entities should

adopt counter measures. The problem in the context of public procure-
ment, however, is that the monitoring and investigation of industry may
be expected to be beyond the tasks, competence and resources of procur-
ing entities. Of course, procuring entities will have an idea about certain
cost figures but they may not be able to determine the degree of barriers to
entry or investigate price movements and the like in the industry (except
in very special cases). For this the qualified competition law enforcement
agencies have the knowledgeable staff and the resources to ensure moni-
toring that extends over longer periods of time.
The industrial economic insights presented above are thus highly rel-
evant for procurement entities to determine the risk of cartel formation
for a particular tender. Entities may be able to generate some, but not
all, information themselves to assess the relevant procurement market.
Nevertheless, procuring entities can take a number of measures to prevent
bid rigging cartels if they fear that collusive forces are at work.
Reducing the number of tenders will make it more attractive for

competitors to violate a cartel agreement since the expected profits
from attaining a contract are higher in relation to the expected costs
of the breaking down of the cooperative behaviour.
If the enterprises in the relevant market are characterized by dif-
ferent market shares, different production costs or production
capacity, procurement entities can instigate competition between
them by devising homogeneous lots or, in the alternative situation,
heterogeneous lots.
Close cooperation between competition law enforcement agencies
and public procurement agencies could mitigate a lack of informa-
tion from which the latter may be expected to be suffering. Under
procurement regimes procuring entities are, however, not neces-
sarily collaborating closely with those agencies and institutional
priorities between procuring entities and competition law enforce-
ment agencies may divert in light of the limited resources available
to them. In such circumstances, procuring entities may have to
rely upon tools they themselves can employ to prevent bid rigging
conspiracies.
In addition, procurement entities can employ detection strategies
such as requiring bidders to submit a detailed price schedule and to
closely compare the schedules between various bidders. If procure-
ment entities have developed a strong reputation for this kind of
conduct, cartels may be required to form more detailed and complex
agreements.

4.2 Cartel Stability
As shown above, forming a cartel is more difficult than might be com-

monly believed. Yet, even if a cartel has been formed successfully, this
does not mean that it is a long-lived phenomenon. This section of the
chapter presents critical issues facilitating cartel stability that have been
identified in a classical industrial economics framework. If it is found that
the issues considered below are characterizing the industry or a particular
local market, procurement entities should consider taking measures to
undermine cartels.
Industrial economics theory suggests that cartels are inherently unsta-
ble. As long as price exceeds marginal cost, firms have an incentive to
increase their output in order to increase profits. These incentives differ
between firms as well as over time. Since every firm has this incentive,
cartels are inherently unstable. In the presence of different cost structures,
for example, efficient producers have a stronger incentive to increase
output and reap higher profits at the expense of cartel members. If indus-
try demand is strongly fluctuating, the incentive for firms to default upon
the cartel agreement will change over time. The higher the market demand,
the more attractive it becomes for cartel members to cheat and to increase
output. While the growth expectations of the market create incentives for
firms to cooperate as the future profits of cooperation are larger, a decline
in the market may reduce expected profits and tempt more efficient com-
panies to try to attain a greater market share. In an inter-temporal setting,
cartel stability depends on the discount rate of future income. Discount
rates must be low enough firms must value future profits sufficiently
highly to outweigh the short-run profits to be realized from defecting from
the cartel agreement.103 It is only in such situations that cartel agreements
would be beneficial. From an industrial economics perspective, cartel
stability appears to be essentially linked with the threat of sanctions that
awaits cartel violators and the likelihood of detection.
Regarding the first issue sanctions industrial economics suggests
that maintaining a cartel is easier if there are credible104 sanctioning mech-
anisms to enforce cooperation between cartel members. Retaliatory strate-
gies that can be employed on industrial markets include the loss of funds
103 The underlying assumption here, of course, is that competitors do not
engage in a second collusive agreement once they have been betrayed.

104 It is worth mentioning that sanctioning cheating cartel members normally
comes at a cost to the cartel members, who will have to compare the benefits of
sanctioning with the costs of executing such sanctions. Sanctions are only worth
enforcing if the expected net benefit is positive.

paid to the cartel members, making the violator the base point for the
calculation of transport costs and the reversion to aggressive competitive
conduct. Furthermore, excess production capacity may also constitute a
credible threat to defaulting on a cartel agreement.105 It lends credibility to
the fear that defecting from the cartel agreement will reduce the expected
future profits to competitive levels. It goes without saying that sanctioning
activities are not restricted to the particular market in which the cartel is
operating but can extend to other industries in which cartel members have
contacts. This is a clear and present danger for large conglomerate firms
that may have several multi-market contacts.
These sanctioning strategies will, however, only have any deterrent
effect if violation of a cartel agreement is detected. With regard to the like-
lihood of detection, industrial economics tells us that vertical integration
can allow suppliers to effectively undermine cartel agreements reached in
the supplying industry. Vertical integrated suppliers106 can sell a product
at the agreed price to their downstream entity, but since the true cost
remains the production cost of the supplier, the downstream entity can
undercut the prices of its competitors. An increase in the market share and
output of the vertically integrated entity reduces the demand of its com-
petitors in the cartelized industry. Thus vertical integration has negative
repercussions on the stability of the cartel agreement.
Furthermore, industrial economics suggests that concentrated indus-
tries and industries with few competitors find it easier to maintain agree-
ments.107 This is based on the understanding that they are more likely to
notice changes in industry output. Since they stand to lose more from a
violation of the cartel agreement, they have higher incentives to monitor
compliance. Detection is easier if sales volatility and changes in customers
are relatively low and if sales occur frequently. As mentioned above, the
detection of violators will also be easier, and indeed immediate, if govern-
ment agencies publish the bidding results of offers received or contracts
awarded. Third parties such as trade associations may also play an impor-
tant role in the detection of cheaters when competitors are willing to give
them sensitive business or production data that can be used for monitoring
the market.
In contrast to the above issues, product differentiation may complicate
the detection of cartel cheating. In markets that are characterized by
strong branding and strong and sudden changes in consumer behaviour,
105 See Martin (1994), 167.

106 Ibid., 166.
107 This passage is based on Martin (1994), Chapter 6.

demand fluctuations perceived by other cartel members could also be

attributable to changing consumer behaviour rather than to a breakdown
in the cartel. To the extent that violations of the cartel agreement are
subtle, a cartel renegade could go undetected.
The above treatment requires the procuring entities to be capable of
analysing the structural determinants of industrial markets. While, in
special cases, procuring entities may be able do this successfully, in most
cases one may assume that procuring entities may not have the resources
available to execute a fully fledged research. Yet they may be able to
obtain some of the necessary data to generate relevant insights into the
procurement market. If a procuring entity suspects that factors facilitating
collusion are present in a given market, or if they suspect that collusive
forces are at work, the best strategy available is to limit market predict-
ability and market transparency.
Public procurement entities operate on behalf of the general public and
cannot afford opaque rules on information disclosure without exposing
themselves to charges of corruption. And yet limiting transparency by
announcing details of bids received and successful bidders may undermine
cartel stability. Partial disclosure limited only to the announcement of
the selling price, and only after a period of time has passed, will protect
cartel renegades and increase their expected profits from leaving a cartel.
Furthermore, not announcing the size and time frame of future procure-
ment tenders may also increase the stakes for cartel members to bid com-
petitively and to renegade against the cartel agreement.
The above factors may help authorities to determine if there is an
increased likelihood that market actors are able to successfully form and
operate a cartel. If that is the case, authorities can take counter measures.
The above theory will be applied in the context of the Japanese construc-
tion sector in Part 2 of this book.

4. Auction theory and collusion
1. INTRODUCTION
In recent years auctions have become enormously popular and are being
used in a large number of economic exchanges in both the public and
private sector. They have been used in the selling of mobile phone licences,
in the decentralization of electricity markets and will become the default
means of allocation in the worlds largest greenhouse gas emissions
trading system, the European Emissions Trading System.
There are four reasons that make this allocation mechanism attrac-
tive. First, an auction is designed to lead to self-revelation of the bidders
private values. In the presence of inherent information asymmetry in
which a potential seller is unable to determine the market value of a partic-
ular object, an auction mechanism can yield higher revenues than simply
quoting a price or conducting repeated negotiations with potential buyers.
While this is very desirable from a theoretical point of view, it should
be noted that bidders are generally reluctant to reveal their preferences
because they fear that competitors could take advantage of them thus,
protection of this information is crucial for firms. Second, auctions can be
designed to ensure allocative efficiency. It should be noted that efficiency
here is to be understood as awarding the bidder with the highest valuation
for an object with the tender.1 Third, auctions legitimize transfers which
would otherwise be suspect. Prior knowledge of the auction rules provides
bidders with a transparent framework for determining how their bids will
be assessed while, at the same time, assuring bidders that selling agents
have clear tender selection criteria.2 Fourth, since no time-consuming
negotiation needs to take place, auctions are fast allocation mechanisms
although it should be noted that the development of an auction mecha-
1 Implicitly assuming away the possibility of credit-rationed bidders: see

Milgrom (2004), 57. Maximization of social welfare, defined as the maximization
of the sum of producer surplus and consumer surplus can be reached if side pay-
ments (in the presence of budget balance constraints) are possible. In such cases
Pareto optimal allocations, whereby one person is better off without someone else
being worse off, are feasible.
2 See Rothkopf and Harstad (1994), 368.
36

Auction theory and collusion 37
nism depends on the object being auctioned and it can be a serious and
time-consuming process.
This chapter presents a non-technical introduction to auction theory
and collusion. It seeks to familiarize the reader with the most relevant
concepts of auction theory and presents important lessons from auction
theory which can be employed to avoid bid rigging conspiracies. The
chapter is divided into three parts. The first part introduces general
auction formats and frequent underlying assumptions of auction models
(Section 2). Drawing from the established understanding, the second part
will present the contributions of auction theory to collusion (Section 3).
The third part highlights some empirical findings (Section 4). Section 5
concludes.
2. AUCTION FORMATS AND UNDERLYING

ASSUMPTIONS
An auction can be understood as a set of rules which translate information

revealed by bidders by means of an allocation rule and a payment rule into
efficient outcomes. The challenge of auction theory is to develop auction
rules which are tailored to the preferences of bidders in such a way as to
provide Pareto optimal3 allocations. Auctions do not only differ with
regard to allocation and payment rules but also in respect of the amount
of information they require bidders to reveal. Standard auction types
and determinants that influence bidder preferences and behaviour will be
examined below.
There are numerous possibilities for the design of auctions. It is impor-
tant to realize that there is no one size fits all approach that would
yield optimal auction results in all situations. On the contrary, (auction)
mechanism design is an intricate process that requires due consideration
of a wide range of factors, which include bidder preferences and market
structure.
Despite the great variety of auctions, standard auction models frequently
fall into certain categories, or formats. A standard auction is one in which
the highest bidder among potential buyers, or the lowest bidder among
potential sellers, wins. Since there is an almost perfect correspondence in
3 Pareto optimality describes situations in which it is impossible to make one
person better off without making at least someone else worse off. In the absence of
side payments between bidders, Pareto-efficient but sub-optimal allocations may
occur.

Table 4.1 Standard auction types
Open auctions Closed auctions

Ascending price auction (English auction) Second-price sealed-bid auction
(Vickrey auction)
Descending price auction (Dutch auction) First-price sealed-bid auction
results,4 it is quite unimportant to distinguish between the forms.5 This

is why the discussion in this chapter applies equally to public procure-
ment tenders. Standard auctions are commonly divided into open and
closed auctions. In an open auction bidders are aware of their com-
petitors bids; in a closed auction they are not. Two examples of an open
auction are the ascending price auction (also called the English auction),
and the descending price auction (also known as the Dutch auction). Two
examples of a closed auction are the second-price sealed-bid auction (fre-
quently referred to as the Vickrey auction6) and the first-price sealed-bid
auction. The four standard auction types are presented in Table4.1.
In an (open) ascending price (English) auction, the price is raised by
the auctioneer or by bidders themselves until only one bidder remains.
At any particular point in time bidders know the level of the current best
bid.7 Such auctions are often used by auction houses like Sothebys. In
the (open) descending price (Dutch) auction, the price decreases continu-
ously until one bidder accepts the current price. A well-known example
where (sequential) (open) descending price (Dutch) auctions are used is
the flower auction in Aalsmeer (the Netherlands). In a closed sealed-bid
auction bidders are only allowed to enter one bid; thus they are unable to
react ex post to their rivals. In the (closed) first-price sealed-bid auction
the highest bid wins, while in the closed second-price sealed-bid (Vickrey)
auction, the highest bidder is only required to pay a price equal to the
second highest bid.
Since the winning bidder alone determines the amount to be paid in
an (open) descending price (Dutch) auction and in a (closed) first-price
4 With the possible exception of the invalidity of reserve prices and treating
zero as an implicit limit to acceptable bids. Despite the intuitive appeal of the latter
argument, Shubik (1983), 39 ff, cites Herodotus, who reported Babylonian mar-
riage markets which included auctions starting at negative bidding values.
5 Rothkopf and Harstad (1994), 366.
6 Named after Nobel Laureate William Vickrey, who first presented this
auction in his seminal paper on auctions: Vickrey (1961).

7 McAfee and McMillan (1987), 702.

sealed-bid auction, both models are considered to be equivalent. Similarly,

since the price the winning bidder has to pay is determined by the second
highest bidder, the outcomes of (open) ascending price (English) auctions
and closed second-price sealed-bid (Vickrey) auctions are also equivalent.8
Having reviewed the standard auction types, relevant factors that influ-
ence the bidders preferences will be considered. A good understanding
of bidders preferences will enable auctioneers (that is, procuring entities)
to optimally design the auction and to maximize revenue (or minimize
expenses). Issues to be examined are the number, the homogeneity and
substitutability of the objects which are being auctioned. The information
available to bidders, the independence of bidders values, the distributive
symmetry and the risk-averseness of participants will also be examined.
The number and nature of the goods that are being auctioned have
important implications. With regard to the quantity of goods to be auc-
tioned, one can generally distinguish between single unit and multi-unit
auctions. In the former, the item is assumed to be indivisible, while in the
latter, any number of items can be auctioned.9 Modelling of multi-unit
auctions or several sequential single unit auctions is complicated by the
introduction of two important factors which have a bearing on a bidders
valuation and willingness to participate in a tender. Goods can be comple-
ments or substitutes and they can be homogeneous or heterogeneous. If
obtaining one item makes the bidder willing to pay more for a second item,
the goods are complements; if the bidder is willing to pay less, they are
substitutes. Homogeneity and heterogeneity, in contrast, refer only to the
nature of the object. If they are identical they are homogeneous; if they are
not, they are heterogeneous. Such factors can be important not only where
the quality of the goods auctioned is different, but also if the quantity of
goods contained in lots is different.
Single unit auctions do not impair allocative efficiency considerations
regardless of whether the goods are complements or substitutes. In the
case of multiple unit auctions, particularly if one allows for heterogeneous
goods, concerns regarding allocative efficiency may be particularly severe
if complements are auctioned inefficiently.10 Given the exponentially large
number of possible allocations, auction algorithms and bidder strategies
of models of multiple heterogeneous goods are very complex.
Besides the more objective elements discussed above, auctions can
8 Wolfstetter (1999), 187. The best strategy in these models is for bidders to
bid their true value.
9 See Brgers and van Damme (2004), 28 ff, for auction models that address
such issues.
10 For a recent review see Milgrom (2004), Ch 8.

be designed to address such elements as the availability of information,

independence, distributive symmetry and risk-averseness, all of which will
have a bearing on bidders preferences. Each will be discussed in turn.
There are various assumptions regarding the information that is avail-
able to bidders. Depending on this information, their expected bidding
strategy will differ and, consequently, the auctioneers strategy to maxi-
mize revenue should also differ. The literature distinguishes between (inde-
pendent) private-value models, common-value models and correlated
value models. In private-value models bidders have certain knowledge,
which is strictly private to them (such as the price they would be willing to
pay in a tender) and it is assumed that the bidders values are independ-
ent of each other.11 Common-value models, by contrast, assume that the
actual value is identical for all participants, but bidders do have diverging
private information about this value.12 It is assumed that bidders values
depend on signals from other bidders.13 Correlatedvalue models assume
that bidders valuations are positively correlated and hence dependent
upon each other. An example of the latter would be the value of a licence
to supply coffee to a ministry where the amount of coffee consumed in the
previous year by the civil servants would be made public. Bidders cost
calculations would take this information into account and bids would thus
no longer be independent of each other.
In much of the auction literature it is assumed that each bidders private
information is independent of that of other bidders. Myerson14 uses the
term preference uncertainty to describe private information that, even if
known by other bidders, would not induce them to reassess their personal
values.15 Information that would induce competitors to reconsider their
own value is referred to as quality uncertainty.16 Assumptions about
independence are important in order to anticipate bidder behaviour. If
private information is correlated and auctioneers successfully induce
11 In modelling contexts, the values of bidders are drawn independently from

a common distribution.
12 For example, bidders would have different geological predictions about
gold reserves when bidding for mining rights, though all participants valuation
of the existing gold is uniformly determined by the quantity to be mined and the
current market price.
13 See Klemperer (2000) for an elaboration of hybrid models.
14 Myerson (1981), 60.
15 Though, of course, they may well alter their bidding strategies. Ashenfelter
(1989), 27, postulates that bidders do alter their valuations in art auctions once
another bidders valuation is known and that artwork which is not being sold at an
auction can get burned (i.e. substantially loses in value).
16 Myerson (1981), 60.

bidders to reveal their preferences, information and beliefs, auctioneers

are able to reap substantial parts of the bidders surplus.17
A large body of auction theory literature assumes symmetry of beliefs.
Buyers are modelled to have common underlying preferences and draw
their information from a symmetric probability distribution.18 Depending
on the distribution of preferences, the effectiveness of particular auction
designs differs. Long after auctions addressed bidders asymmetric infor-
mation19 did scholars also examine the complexity of equilibria under
truly asymmetric circumstances.20 Auctioneers can therefore choose from
a large array of auction designs the one that is most appropriate for the
bidders they expect to participate in their auction.
Another bidder preference which auction models should take into con-
sideration is the degree of risk-aversion. Participants may be risk-taking,
risk-neutral or risk-averse. Risk takers are willing to take unfair bets, risk-
neutral participants are prepared to take fair bets, and risk-averse bidders
are not even willing to take fair bets.21 Bidding systems with a wide variabil-
ity in prices, or uncertainty about the actual price to be paid, are evaluated
negatively by risk-averse participants. Auctioneers who accurately predict
the level of risk aversion in bidders can employ appropriate auction rules to
set incentives for bidders to induce them to pay higher prices.
3. LESSONS ON COLLUSION
Having introduced auctions, the four standard auction models and rele-
vant assumptions about bidders preferences which are used for modelling
17 Ibid., 70 ff.
18 For examples of private-value models, see Maskin and Riley (1984),
Matthews (1983), Milgrom and Weber (1982a), Riley and Samuelson (1981). Early
examples of symmetric common-value models include Wilson (1977).
19 Early examples of asymmetric common-value models include Milgrom and
Weber (1982b), and Engelbrecht-Wiggans, Milgrom and Weber (1983).

20 Maskin and Riley (2000a) and (2000b) construct models where bidders
independent and private values are drawn from heterogeneous distributions.

Marshall, Meurer, Richard and Stromquist (1994), 194, point out that even
though Myerson (1981) introduced distributional heterogeneity in his revenue
equivalence model, he did not establish that Nash equilibrium bidding strategies
existed for such distributions.
21 For a model of risk-averse sellers and a discussion of risk in independent-
value models, see Maskin and Riley (1984). For a discussion of risk in common-
value models see Milgrom and Weber (1982a). For risk-averse buyers see
Matthews (1983) and (1987).

purposes, the following section presents lessons that can be learned from
auction theory with regard to collusion.
One major finding of auction theory is that in a symmetric competitive
setting with independent private values, there is no systematic advantage
of sealed-bid over open-bid auctions, or the reverse.22 This so-called
revenue equivalence theorem does not hold true, however, if bidders do
not compete with each other.
Since its design may have a bearing on the revenue and the overall
outcome of an auction, with perverse repercussions on both product and
service markets, factors that determine collusion need to be assessed. This
section of the chapter presents a survey of auction theory literature in
which competitive behaviour is marred by collusion. It should be noted,
however, that auction designs are only capable of preventing in-auction
collusion. This term is used to describe activity of existing cartels as well as
activities to form collusive agreements during an auction. Collusion occur-
ring outside the framework of an auction cannot be addressed by the design
features of auctions but has to be addressed by public procurement and
competition law. It is, however, important to note that in-auction collusion
is facilitated by repeated interactions of bidders and, in particular, when
multiple units are being auctioned.23 Consequently in this chapter particu-
lar emphasis will be placed on cartel formation, stability and the counter
measures proposed by auction theorists to avoid in-auction collusion.
In contrast to the in-depth analysis of competitive bidding, collusive
behaviour has received less attention.24 This is particularly lamentable since
cartels inflict considerable costs upon society. While empirical evidence
of collusion remains scarce, there have been noticeable advances in the
theoretical literature, particularly regarding multi-unit auction theory.25
There are a number of insights which can be drawn from the existing lit-
erature. First, the presence and the characteristics of collusive mechanisms
depend crucially on the object that is being auctioned and on the nature
22 Underlying this argument is the revenue equivalence theorem. This states
that under certain circumstances different auctions yield the same revenue for the
seller. Under the assumption that reservation prices were independently drawn from a
uniform distribution, Vickrey (1961) established the revenue equivalence for open and
sealed first-price biddings. The theorem was independently generalized by Myerson
(1981), and Riley and Samuelson (1981). For further insights into this theorem see,
amongst others, Milgrom and Weber (1982a), 1092 ff, Maskin and Riley (1985), 150
ff, Riley (1989), Maskin and Riley (2000a), and Milgrom (2004), 16 and 75 ff.
23 Salmon (2003), 10.
24 Mailath and Zemsky (1991), 467.
25 Multi-unit auctions are becoming more widely applied in government pro-
curement and privatization programmes as well as internet auctions.

of the auction rules.26 Hence the detection of collusion is necessarily case-

specific.27 Second, there are four fundamental problems of cartels which
have to be overcome.28 These elements are: (i) winner determination and
the division of cartel proceeds; (ii) cartel enforcement; (iii) new entries; and
(iv) the auctioneers response to destabilize the cartel.29 In order to facilitate
the assessment of auction theoretic insights in light of public procurement
tenders and bid rigging conspiracies, the above issues are treated in the
context of cartel formation (Section 3.1) and cartel stability (Section 3.2).
Because of their relevance for cartel formation issues (i), (iii) and (iv) will
be treated first. Issue (ii) will be addressed in the context of cartel stability.
3.1 Cartel Formation
3.1.1 Winner determination and the division of cartel proceeds

Important elements in any collusive mechanism are the determination
of the designated bidder and agreement about the division of cartel
proceeds.30 Agreement on these two issues is a precondition for the estab-
lishment of any cartel. In fact there are a number of strategies that can
be employed to efficiently31 designate a winner that is compatible with
the bidders incentive structure and divide cartel proceeds. They range
from pre-auctions with equal32 or unequal33 transfers,34 over fixed dis-
tribution agreements,35 to schemes in which outside agents36 orchestrate
26 See Hendricks and Porter (1989). Klemperer (2002), 21, states good
auction design is not about one size fits all.
27 Porter and Zona (1997), 2.
28 See McAfee and McMillan (1992), 579. For didactical reasons winner deter-
mination and profit distribution have been combined into one argument.
29 While cartel stability is an inherent problem for any cartel, victims can be
quite disorganized. This may be the case if costs accruing to any individual are
low enough not to induce the taking of any effective counter measures. The sugar
industry may serve as an example.
30 Two typologies are given by Abdulkadiroglu and Chung (2003), 2, and
McAfee and McMillan (1992), 582.

31 Efficiency here is used to mean that the bidder with the highest value wins
the auction.
32 McAfee and McMillan (1992).
33 The schemes are ex ante but not ex post budget balanced, which underlines
the importance of a third party to organize knockouts.

34 Graham, Marshall and Richard (1990).
35 Cartel members could agree to take turns according to determinants that
have been specified in a prior agreement. One example would be a cartel in which
the members take turns in accordance with the phases of the moon.
36 Graham and Marshall (1987).

the cooperative behaviour. In addition to these collusion strategies that

occur outside the actual bidding process, there are strategies that can be
employed to create agreements during the bidding itself. These are par-
ticularly relevant with regard to multi-unit auctions. First, the research
findings relating to single object auctions with both private and common
values will be considered. Multi-unit auctions are then considered. Multi-
unit auctions can offer bidder opportunities for repeated interaction
during the course of the actual auction and thus present particular chal-
lenges for auction design.
Single objects Several authors analyse cartel mechanisms that effi-

ciently37 designate a winner that is compatible with the bidders incentive
structure and divide cartel proceeds when bidders only have private infor-
mation about their own values.38 In a single unit auction context, McAfee
and McMillan39 show that such mechanisms can be implemented by a
pre-auction if cartels are able to exclude new entrants and make side pay-
ments. They distinguish between cartels that require transfers to be equal
in all instances and cartels which merely require transfers to be equal on
average. Graham and Marshall40 have studied bidder behaviour at single
object (closed) second-price sealed-bid (Vickrey) auctions and (open)
ascending price (English) auctions within an independent private-value
model. They postulate that cooperative behaviour orchestrated by an
outside agent via a (closed) second-price sealed-bid (Vickrey) pre-auction
knockout41 can strictly dominate non-cooperative behaviour. They find
that in equilibrium the cartel will embrace all bidders.42
Building upon this work Graham, Marshall and Richard43 propose
efficient but unequal44 distribution schemes for heterogeneous bidder
coalitions45 to distribute gains from collusion. In a (closed) second-price
37 Efficiency here is used to mean that the bidder with the highest value wins
the auction.
38 Klemperer (2000).
39 McAfee and McMillan (1992).
40 Graham and Marshall (1987).
41 The term knockout refers to a secondary auction.
42 Since in equilibrium auction rings embrace all bidders, auctioneers are
advised to respond strategically by increasing their reservation price as the number

of bidders increases. See Graham and Marshall (1987), 1226. Intuitively this can be
explained by the absence of free-riding problems in auctions.
43 Graham, Marshall and Richard (1990).
44 The schemes are ex ante but not ex post budget balanced, which underlines
the importance of a third party to organize knockouts.

45 As in their earlier work, Graham, Marshall and Richard (1990) propose a

sealed-bid (Vickrey) auction framework, Mailath and Zemsky46 show that

ex post budget balancing efficient collusion, even for subsets of ex ante het-
erogeneous bidders, is possible. Applying numerical algorithms, Marshall,
Meurer, Richard and Stromquist47 do not only find that a coalition
formed of bidders who draw their valuations from a homogeneous distri-
bution demonstrate different values, essentially transforming the analysis
to one of asymmetric values, but also that cartels in (closed) second-price
sealed-bid (Vickrey) and (open) ascending price (English) auctions are
more stable and more profitable than (closed) first-price sealed-bid
auction cartels. Aoyagi, and Skrzypacz and Hopenhayn examine dynamic
bid rotation schemes with bid coordination schemes that are based on past
awards of the cartel members.48
Hendricks, Porter and Tan lament that the theoretical auction literature
on collusion has focused exclusively on private-value models with inde-
pendent signals.49 They postulate that it has been wrongly assumed that
the risk of overvaluing common-value objects and ending up paying more
than the object is actually worth50 creates a certain propensity to cooper-
ate and to exchange information. They find empirical evidence that the
winners curse can be an obstacle to collusion in common-value model
auctions if there are few bidders, high investment costs and relatively
pessimistic expectations. The reason for this is that cooperation favours
low-value bidders more than high-value bidders.51
Multi-unit objects Surprisingly little is known about the efficiency

properties of multiple unit auctions. Much of the conventional wisdom
comes by analogy from single unit auctions.52 Given the complex-
ity of strategic interaction that is hosted within a multi-unit auction
format, they merit particular attention from an antitrust point of view.
Aspects reviewed in this section include demand reduction and signalling
solution via a system of nested knockouts. The term knockout is used to refer
to a secondary auction while nesting describes the formation of collusions within
a cartel.
46 Mailath and Zemsky (1991).
47 Marshall, Meurer, Richard and Stromquist (1994).
48 Aoyagi (2003); Skrzypacz and Hopenhayn (2004).
49 Hendricks, Porter and Tan (2003), 4.
50 This concept is generally referred to as the winners curse. If auctions of
objects which have an unobserved but fixed value are won by bidders with the
highest and most overstated valuations, the bidder will suffer financial loss and
thus be cursed.
51 Hendricks, Porter and Tan (2003), 3.
52 Ausubel and Cramton (2002), 1.

strategies. Demand reduction is a strategy used by potent market players

or bidding rings to limit their own demand that triggers a significant
reduction in the auction price so that goods can be bought more cheaply.
This strategy can thus be employed to ensure the profitability of a
cartel. Signalling is a strategy used during the process of an auction in
which bidders communicate their intentions of, for example, sharing the
market to competitors. This strategy is thus used to agree upon a mutu-
ally beneficial distribution of the auctioneers revenues and thus a means
to reach a cartel agreement. Both demand reduction and signalling
will first be reviewed in the context of simultaneous (closed) sealed-bid
auction models before examining simultaneous (open) ascending price
(English) auction models.
As indicated earlier, there are many different auction schemes. Given
the limited scope of this text only three important (simultaneous) closed
sealed-bid auction models will be discussed.53 These are the pay-as-you-
bid auction, the uniform price auction and the multi-unit Vickrey
auction. They will be described and reviewed in light of their susceptibil-
ity to demand reduction. By contrast, open multi-unit auction formats
(discussed later) and closed auctions are not vulnerable to signalling, since
competitors are not informed about the submitted bids.
The first model, the pay-as-you-bid auction54 is a closed sealed-bid
auction in which bidders simultaneously submit demand schedules55 for
goods. Bidders win the quantity demanded at the clearing price and pay
the particular price for each unit as indicated in their submitted demand
schedule. In order not to pay unnecessary high amounts for the goods they
seek to purchase, bidders have to estimate the market clearing price and
bid slightly above it.56 The second model, the uniform-price auction, is a
closed sealed-bid auction in which bidders simultaneously submit demand
schedules for goods. However, they only pay the clearing price for every
unit demanded at that particular price.57
53 See Krishna (2002), and Ausubel and Cramton (2002).

54 Also called discriminatory auctions or multiple price auctions.
55 In this section all demand schedules are assumed to be downward sloping,
i.e. more is being demanded if the price decreases.

56 This exposes less informed bidders to the strategic risk of misjudging the
clearing price and paying more for identical goods. This increases the transaction
costs to the parties of participating in a bid and may even deter potential bidders
from participating, which in turn reduces the competitiveness of the entire market
and hence its efficiency.
57 In contrast to the pay-as-you-bid auction, this auction format has two
advantages. First, every bidder pays the market clearing price which is equal to
the overall marginal valuation. Second, in the absence of the danger of paying too

Both the pay-as-you-bid auction and the uniform auction format can
be expected to be inefficient in the presence of market power or collu-
sion. In such cases they may give rise to inefficiency58 inducing demand
reduction strategies.59 In multi-unit auctions dominant players recognize
the interdependence of their bidding strategy and competitors bidding
behaviour. A strategy of self-restricting the quantity demanded while
bidding the minimum price to indicate interest in a number of units can
generate large consumer surpluses. The inherent inefficiency stems from
the fact that users with the highest value for an item do, in fact, prefer not
to attain it: large bidders win too little and small bidders win too much.
Salmon60 points out that if such behaviour is strictly unilateral, this does
not amount to collusion. However, where it involves strategic considera-
tions exemplified by trigger strategies, such behaviour would amount to
(tacit) collusion.61
A third sealed-bid multi-unit auction format does not suffer from
demand reduction in private-value environments.62 The (closed) second-
price sealed-bid (Vickrey) auction system (a multi-unit Vickrey auction), is
an auction in which bidders simultaneously submit demand schedules for
goods. Bidders win the quantity demanded at the clearing price and pay an
amount equal to the highest losing bid for each unit. Since sincere bidding
is a dominant strategy, demand reduction will not occur.
In contrast to closed auction formats, in (simultaneous) open multi-
unit auctions the price and the allocation of goods are determined by
open competition. Given the possibilities to obtain information from the
ongoing auction, both demand reduction and signalling strategies may be
employed. Their success is, however, dependent among other factors
upon the actual auction format used.
Under the (open) uniform-price ascending clock auctions, a fictitious
much for the same item, less informed bidders are more inclined to participate in
such auctions.
58 Inefficiency is created by differential bid shading, i.e. when bidders with
identical marginal values reduce their bids by different amounts so that awarding
the bidder who values the item most is impossible. See Ausubel and Cramton
(2002), 4.
59 For examples see Weber (1997), and Ausubel and Cramton (2002).
60 Salmon (2003), 5.
61 Distinguishing between tacit collusion and pure strategic firm behaviour
is complicated if not impossible. In a multi-unit auction both bidders could, for

example, independently decide to pursue a demand reducing strategy. The
outcome would be identical to tacit and, indeed, outright collusion.
62 In a common-value environment, however, Vickrey auctions do not always
produce efficient equilibria.

auctioneer announces a slowly increasing price. For each price bidders

are allowed to observe and respond by quoting quantities they wish to
purchase. The quantities demanded are added horizontally in order to
determine the market demand. As long as demand exceeds supply, the
price will be increased. Unlike in the (closed) sealed-bid uniform-price
auction, in the (open) uniform-price ascending clock auction bidders may
be informed about other bidders demanded quantities.
(Open) uniform-price ascending clock auctions are easily implemented
since bidders will only have to quote the quantity demanded and observe
simple rules of activity. As in the case of simultaneous ascending (multi-
unit) auctions which can, for example, be applied in contexts where
goods are not identical this auction format is vulnerable to demand
reduction and collusion. In cases where market power is limited, however,
inefficiencies from standard ascending clock auctions are also expected to
be low.
Kagel and Levin suggest that demand reduction can be stronger under
the (open) ascending price auction than under the (closed) sealed-bid
uniform-price auction.63 With respect to (tacit) collusion in the multi-unit
ascending price auction environment, Ausubel and Schwartz64 postulate
the existence of a unique cooperative equilibrium if bidders are able to
use backward induction.65 If bidders fail to immediately reach a low
price outcome, signalling66 can be employed to negotiate a mutually
acceptable allocation. In a simultaneous ascending price bid auction
environment with a limited number of participants and known limit prices
of fringe firms, Grimm, Riedel and Wolfstetter67 cite the German GSM
Spectrum Auctions as a powerful example of how effectively signalling
can be used to reach an almost immediate mutually acceptable strategic
demand reduction.
In contrast to (open) ascending price auctions, other simultaneous
multi-unit auctions such as the (closed) first-price sealed-bid or the
(closed) second-price sealed-bid (Vickrey) auction are not vulnerable to
in-auction signalling since they do not offer bidders the opportunity to
react to one another.
In the context of demand reduction the Ausubel auction deserves par-
63 See Kagel and Levin (2001).

64 See Ausubel and Schwartz (1999).
65 Bidders are assumed to imagine how the auction will be developing and to
derive from this a mutually acceptable offer at the beginning of the auction.
66 By, for example, using the financially inconsequential digits of their bids,
parties can signal their identity or indicate the market for which they are retaliating.
67 Grimm, Riedel and Wolfstetter (2001).

ticular mention. Ausubel68 proposed an efficient ascending auction design

for homogeneous goods that eliminates incentives for demand reduction69
and rewards the revelation of true values.70 As in the ascending price
auction, quoted prices continuously increase until demand equals supply.
The bidder who demands the highest quantity when the collective demand
of all other bidders is one unit less than the total quantity supplied will be
awarded one unit at the current price. Consequently the bidder with the
highest valuation for a particular unit is able to secure it and pay the price
indicated in the demand schedule. Notwithstanding the notable efficiency
properties which the Ausubel auction demonstrates in both private-value
and common-value environments, Manelli, Sefton and Wilner find that
this auction format generates incentives for bidders to engage in strategic
overbidding to mislead competitors.71
While signalling and demand reduction certainly are strong points of
critique of multi-unit ascending price auctions, there are two factors which
complicate effective collusion. First, Brusco and Lopomo72 show that
collusion becomes more difficult as the number of bidders rises relative to
the number of items. Weber73 presents a vivid example of how difficult it
can be to reach a mutually acceptable allocation of heterogeneous permits
when the number of participants is large. Second, Brusco and Lopomo74
show that considerable externalities or synergies across items negatively
impact upon prospects of collusion.75 The authors conclude that as a
result of signalling,76 collusion is possible, even in the presence of a high
ratio of bidders to objects, and under some complementarities in the
bidders utility functions.
While the above strategies to determine winners and allocate cartel
proceeds have bidders as protagonists, other strategies attribute an
active role to the tendering authority to select the winner from a group
of cartel members. The refusal to select the winner among identical
bids by lottery schemes, but instead by secret or arbitrary criteria,
68 Ausubel (2002). Earlier versions of this paper date back to 1997.

69 For an experimental assessment see Kagel and Levin (2001).
70 Ausubel replicates the intuition of the Vickrey auction in a dynamic context.
71 Manelli, Sefton and Wilner (1999), 306.
72 Brusco and Lopomo (1999).
73 Weber (1997).
74 Brusco and Lopomo (1999).
75 For an analysis of externalities in single unit auctions, the interested reader
is referred to Caillaud and Jehiel (1998).

76 See Cramton and Schwartz (2002) for an insightful analysis of FCC spec-
trum auctions.

will thus adversely affect cartel operation and hence stability.77 It will,
furthermore, complicate cartel formation by compelling members to
establish a sophisticated allocation scheme of collusive proceeds. While
this would certainly undermine cartel stability in practice, it should be
observed that such measures may not be easily compatible with public
procurement regimes since they could militate against the principles of
openness and transparency that are frequently used in public procure-
ment regimes.78
Auction theory thus suggests that procuring authorities should secure a
large number of serious bidders, and limit the degree of information that
bidders can exchange in the process of the procurement process to inhibit
signalling strategies. Furthermore, it is suggested that lottery schemes to
select bidders should not be used so as to require cartels to establish more
sophisticated allocation rules.
3.1.2 New entries

As is the case in industrial markets, high economic profits attract potential
competitors. Yet in auctions no profits can be earned by having dominant
players restrict their output while one person increases production to
benefit from higher prices.79 Thus, from an auction theoretic perspective,
the problem of undertakings entering the market is structured around two
basic strategies: pre-auction entry deterrence and optimal cartel member
selection.
With regard to the first element, pre-auction entry deterrence,
Klemperer80 describes (pre) auction entry deterrence and inhibition strate-
gies which include credible signalling, reputation building, limiting pricing
and predation. The applied concepts are comparable to those of industrial
economic theory.
The issue of optimal cartel member selection is particularly grave. In
auctions, non-serious bidders,81 with a valuation below the reserve value
that would not be able to win in a competitive auction, have an incentive
to participate in the cartel and reap a share of collusive profits. Profit max-
imizing cartels must establish membership exclusion constraints which
77 Hendricks and Porter (1989), 10.

78 See, for example, the Chinese Bidding Law, Art. 5, and Government
Procurement Law, Art. 3.
79 Though this may not be true in the presence of supply reduction.
80 For examples see Klemperer (2002), 5 ff, 9.
81 McAfee and McMillan (1992), 585, refer to non-serious bidders as
schleppers.

effectively82 bar non-serious bidders from cartel membership and thus

exclude them from sharing cartel proceeds.
Both elements do not appear to be easily addressed by procurement
entities. They are general impediments to the formation of a bid rigging
cartel that can best be exacerbated by procuring entities by facilitating the
participation of new and potential bidders and by stopping the procure-
ment process if the number of bidders is too low.
3.1.3 The Auctioneers response

Auctioneers can take several measures to destabilize cartels and thus to
obstruct cartel formation. They can choose the most appropriate auction
format for the item they wish to auction and take particular measures to
counter cartels. These measures may be specific to the auction format
or generally applicable. First, the auction formats described above will
be compared and their specific counter measures will be introduced.
Thereafter, the following general measures will be discussed: disclosure
of information, the setting of a reserve price and the importance of a high
number of bidders.
The selection of the auction system does have an impact on collusion.
Robinson argues that in (open) ascending price (English) auctions cheating
will not be effective if the cartel member with the highest evaluation is the
designated winner.83 Similarly Alchian establishes that (closed) second-
price sealed-bid (Vickrey) auctions are quite susceptible to cartelization.84
Thus both formats help to stabilize cartels.
On the other hand (closed) first-price sealed-bid auctions are incentive
compatible in the sense that they reward cheating and complicate the
detection of collusion.85 The introduction of a time limit, in particular, can
create incentives to defect from a cartel.86 (Open) descending price (Dutch)
auctions also reward violators, but here the introduction of a time limit is
not an option.
Both single unit and multiple unit auctions may be ranked in accord-
ance with their generic auction type along a linear continuum between the
82 Non-serious bidders have an incentive to overstate their true valuation in

order to be eligible for compensation from the cartel.
83 Robinson (1985), 143 ff. This finding is established for both common-value
and independent-value models.

84 Alchian (1977).
85 Robinson (1985), 144. Cartel adherence may be induced in the presence
of bidding costs and through positive expected gains through the distribution of
cartel gains.

(open) (closed) (closed) first- = (open)

ascending second-price price sealed- descending
price (English) sealed-bid bid auction Dutch auction
auction (Vickrey)
auction
High cartel Inherent

stability instability
Figure 4.1 Auction designs and cartel stability
two opposing poles of high cartel stability and inherent instability.87

This is presented in Figure 4.1.
With regard to multi-unit auctions, auctioneers have a further design
choice to make. They must decide between auctioning the goods sequen-
tially or simultaneously. Simultaneous auctions may be more susceptible
to cartels than are sequential auctions. This is because there are no delays
in the employment of retaliatory schemes against cartel cheaters and such
schemes are consequently more effective as a disciplinary device.88 This
issue is revisited in the section below when considering cartel stability.
Simultaneous multi-unit (open) ascending auctions give rise to a large
number of collusive practices which need to be confronted. Signalling
may be used as a means of communication. It is used to identify bidders,
indicate retaliation strategies, and to collude tacitly on market sharing.
Cramton and Schwartz89 cite three bidding formats which complicate
collusion by rendering bid tracing more difficult: (i) limiting a bid to three
significant digits; (ii) allowing bids to be increased by one fixed increment
at a time; and (iii) allowing bids to be increased by a range of fixed incre-
ments at a time.
In addition to using the most appropriate auction format for the item
to be auctioned, there are a number of general issues that may be taken
into consideration by auctioneers to obstruct cartelization. The first issue
to be considered regards the parsimonious disclosure of information.
87 Brgers and van Damme (2004), 59. On p. 53 the authors note that this
ranking is identical to the ranking that a revenue maximizing seller would choose
in a non-cooperative setting.
89 Cramton and Schwartz (2002), 14 ff.

In multi-unit auction frameworks, not revealing the identity of bidders

can undermine tacit collusion and complicate effective retaliation. It
complicates the ex post detection of violations of cartel agreements and
consequently makes reneging on the cartel more attractive. It also leaves
bidders unaware of whom they are bidding against. This fosters competi-
tion by ensuring that weak bidders are not discouraged from attacking low
standing bids of dominant market players.90
Furthermore, the reserve price has been receiving much attention from
auction theorists. The setting of reserve prices complicates collusion for
four reasons. First, if bidders know that a (secret) reserve price has been
set, they may be willing to increase their bids more rapidly. This, in turn,
may undermine a bidders propensity to form tacit agreements.91 Second,
agreeing upon demand reduction strategies will be more difficult in the
presence of a reserve price.92 Third, if the reserve value is announced to be
present but kept secret, it will be more complicated for a cartel to determine
its bidding strategy and to estimate its profits from collusion.93 Fourth, as
McAfee and McMillan show, a change in the reserve price can have an
impact on ex post cartel profits and could make cartel members worse off
than they would have been had they behaved non-cooperatively.94
Deciding on the optimal reserve value is not a trivial matter. Graham
and Marshall95 propose setting a reserve price that is dependent on the
expected size of the cartel. Yet one should bear in mind that setting a
reserve value may deter potential bidders and that the future value of
unsold objects may be reduced.96
Perhaps the auctioneers most important weapon to undermine cartels
is to ensure a large amount of bidder participation. A cartels expected
profitability depends on the likelihood of winning and the number of
participants among which proceeds have to be distributed. Therefore
increasing the number of bidders, or keeping the number and identity of
90 Ibid., (2002), 15 ff. In the presence of significant externalities, bidders may

behave more aggressively. This may be the case if bidders fear that their competitors
may acquire a strategic advantage. See, for example, Caillaud and Jehiel (1998).
91 Cramton and Schwartz (2002), 20.
92 Intuitively, bidders are only willing to demand reduce if the money they
save is more than the value they place on an additional unit. In the presence of a
reserve price, the amount they could save is reduced; this will impact negatively on
their propensity to demand reduce. See also Klemperer (2002), 8.
93 McAfee and McMillan (1992), 591 ff.
94 McAfee and McMillan (1992), 58892.
95 Graham and Marshall (1987), 1226.
96 Ashenfelter (1989), 27, suggests that unsold items will get burned, i.e. lose
considerably in value if they are not sold at auction.

prospective bidders hidden, is expected to make cartel formation more

difficult.
In a symmetric single unit auction setting Bulow and Klemperer97
establish that an additional (serious) bidder will more positively influence
competition and revenues than the introduction of an optimal reserve
price. Granting smaller competitors preferential treatment to enable them
to participate in (simultaneous multi-unit) auctions98 can adversely affect
cartel stability, lead to overall higher revenues and social welfare.99
In the case of rotating-bid arrangements, Comanor and Schankerman100
found that they were significantly more common in cartels with few
members than in cartels with a large number of members. This does
not only reflect upon the difficulties of installing and maintaining a
rotating-bidding scheme101 if the number of participants increases, but
also suggests that the emphasis of antitrust policy on identical bids might
be misplaced. Whether the overall effect on the auctioneers profits gener-
ated by the desirable negative effect on cartel formation is outweighed
by the reduction in the expected profits of potential bidders, and hence
an increasing reluctance to participate in a tender, is subject to further
research.
Besides the expedient use of (auction) mechanism design to prevent
bid rigging, auction theory suggests a sparing disclosure of information,
a strategic use of reserve prices and an increase in the number of credible
bidders in order to obstruct bid rigging conspiracies.
The above treatment thus offers a number of insights that can be
used by procuring entities to obstruct bid rigging conspiracies. From
an auction theoretic point of view, one should (i) limit the exchange
of information during auctions; (ii) refrain from using lottery-like
allocation rules; (iii) encourage new entrants; (iv) require a sufficiently
large number of serious bidders to ensure competition; (v) keep the
identity of bidders secret and disclose information only very sparingly;
(vi)use reserve prices strategically; and (vii) last but by no means least,
use (auction) mechanism design to obstruct bid rigging conspiracies.
97 Bulow and Klemperer (1996).

98 See Cramton and Schwartz (2002), section 3.5.
99 It should be noted that auction theory deals with the effectiveness of an
allocation mechanism and is not normally concerned with social welfare considera-
tions of how certain goods or licences are to be allocated upon market participants.
100 Comanor and Schankerman (1976).
101 McAfee and McMillan (1992), 586, note that an enhanced need for com-
munication may increase the odds of detection, while on the other hand evidence
of collusion derived from biddings is reduced.

Auction design will, of course, also have an impact on cartel stability

but, in order to avoid repetition, auction design is addressed in the
context of cartel formation.
3.2 Cartel Stability
In industrial markets cartels earn extra profits by limiting market supply

and increasing prices. Both cartel members and non-cartel members have
an incentive to increase output as long as extra profits can be earned.
The logical consequence is that cartels are inherently unstable since every
market actor has an incentive to increase output while other market par-
ticipants limit their production (the so-called free-rider problem).
As in the case of industrial markets, auctions also give rise to free-
rider problems. This will, for example, be the case where only one bid is
being awarded. In such situations a defaulting cartel member can make a
slightly more competitive bid and reap all the cartel benefits. The problem
of cartel stability is therefore also very relevant in the auction theoretic
context. The self-interested profit maximizing enterprise will thus con-
sider defaulting upon the cartel agreement if the benefits of doing so
exceed the expected costs. As was the case in the context of the industrial
economics discussion presented earlier, from an auction theoretic point
of view such incentives depend on the cost side of detection of violation
and the magnitude of a credible sanction. This section of the chapter will
therefore present an auction theoretic examination of cartel stability and
offer lessons that can be employed for the purpose of public procurement
tenders.
An issue that distinguishes auctions from industrial markets is that
in most cases it will be very clear to cartel members that the designated
winner of a cartel has not been awarded the contract. It is thus immedi-
ately detected that the cartel did not succeed in its attempt to reap extra
profits from collusion. Whether or not the detection of the cheater is
immediate depends on a number of factors. These include the auction
method used, closure rules in the case of multi-unit auctions, the rules in
relation to information disclosure and the criteria for selecting the winner.
Each will be considered in turn.
Regarding the first issue, auction methods, one major finding pos-
tulated by Robinson102 is that cartels are stable in (open) ascending
price auctions but not in (closed) first-price sealed-bid auctions without
102 Robinson (1985). Robinson postulates that this is true for both private and
common-value models.

repeated interaction.103 The intuition behind his argument is that detecting

cheating in an (open) ascending price auction is immediate and that
retaliation on a cartel agreement will lead to competitive behaviour by all
bidders, finally awarding the tender to the bidder with the highest valua-
tion. Hence since low-value bidders only stand to lose from cheating, the
auction mechanism is in fact stabilizing the cartel. By analogy, the same
holds true for (closed) second-price sealed-bid (Vickrey) auctions where
designated bidders are expected to bid their true value.
In (closed) first-price sealed-bid and (open) descending price (Dutch)
auctions, however, a precondition for the designated cartel winner to
make extra profits is bid shading. The designated winners inability to
react to low-value cheaters bidding marginally more than the agreed price,
and hence reaping all the benefits, creates incentives to cheat. Hence, in
the absence of effective enforcement mechanisms, the stability of cartels
is clearly an issue in (closed) first-price sealed-bid and (open) descending
price (Dutch) auctions.
It is not only in the above-mentioned single unit auctions but also in
multi-unit auctions such as the (open) uniform-price auctions, in which
bidders submit demand functions for multiple units of homogeneous
goods and where the lowest market clearing price determines the price
awarded that bidders have to pay that retaliatory practices can be
employed. If, for example, bidders bid high on quantities below their
agreed market share but low on the ultimate unit, the cartel can col-
lectively achieve a low market clearing price. Incentives for other cartel
members to deviate from the cartel agreement are frustrated by the fact
that they would have to overbid the high prices of cartel members in order
to achieve a greater market share.104 It can therefore be concluded that in
closed auction formats also enforcement mechanisms may effectively be
employed.
In an attempt to limit the opportunities for bidders to retaliate against
cartel cheaters within the process of a simultaneous multi-unit auction,
the final round of simultaneous auctions has drawn much attention
from auction theorists. Milgrom105 proposes a simultaneous closing rule
which implies that all auctions remain open until no new bids are placed.
It allows each losing bidder to switch at any time, but is also vulnerable
to collusion.106 At the end of the auction, the multi-stage simultaneous
103 Repeated interaction enables cartel members to retaliate against non-

cooperative behaviour in later periods.
104 Klemperer (2002), 4.
105 Milgrom (2000).
106 Ibid., 264, theorem 8.

auction becomes comparable to a finite game. To accommodate for this,

some simultaneous auction models apply a different closing rule. If bidders
cannot react towards competitors, retaliation against cartel offenders is
not possible and collusive equilibria may not be sustained. Milgrom107
suggests that an auction format with a market-by-market closing would
be more vulnerable to collusion. Klemperer108 proposes an Anglo-Dutch
auction which provides strong incentives for bidders to default upon the
cartel agreement.
Enforcement or retaliatory mechanisms can thus be established in
repetitive interaction (multi-sequential auctions) or through multi-market
contacts in simultaneous (multi-unit) auctions. In both formats in-
auction retaliatory mechanisms will be ineffective in purely single unit
auctions where bidders do not expect any form of future interaction.
The use of sanctions in an auction environment is thus largely depend-
ent upon in-auction detection and sanctioning opportunities. With some
auction mechanisms detection is immediate while other auction designs
do not allow cartel members to punish violations. Cartel stability and
enforcement can be effectively undermined in (closed) first-price sealed-
bid auctions if the procuring entity only discloses partial information
about bidders.109 By complicating the detection of ex post violations of
the cartel agreements, reneging from the cartel becomes more attractive.
Retaliation will need to be executed in repeated interactions between
undertakings. In auction systems in general an important distinguishing
feature of industrial markets is that successful detection of a cartel agree-
ment infringement is ensured in most cases. Even if the winning bid is not
publicly announced, the unsuccessful designated bidder will know that
his bid was not awarded and, in a public procurement framework, most
of the time the identity of the successful bidder will be revealed. Wisely
employing bid-opening rules and the release of information may obstruct
the determination of cheaters and create mistrust between cartel members.
The release of sensitive bidding and cost information may also reveal
sensitive information to competitors and thus prevent them from engag-
ing in competitive bidding. Given that most procurement schemes contain
typical administrative law principles such as openness and transparency, at
least the identity of the cartel cheater will have to be revealed. Postponing
107 Milgrom (2000).

108 Klemperer (2002), 15 ff.
109 Hendricks and Porter (1989), 10, state that schemes where only the winning
bidders identity, but not his bid, is being revealed will effectively undermine
cartels which have colluded to submit identical bids and let the procuring entity
determine the winner by lottery schemes, for example.

publication for a period of time will not enable the fellow cartel members
to retaliate, and hence create higher incentives for defaulting.
In addition to the selection of a good auction design, the employment of
appropriate closure rules and controlling information disclosure, there is
yet another mechanism that can be used to undermine cartel stability: that
of winner selection. Refusing to select the winner among identical bids by
lottery schemes, but instead by secret or arbitrary criteria will adversely
affect cartel enforcement and hence stability.110 Examples of arbitrary
selection criteria could include labour or environmental standards. It will
furthermore complicate cartel formation by compelling members to estab-
lish a sophisticated allocation scheme of collusive proceeds.
From an auction theoretic point of view, it can thus be summarized
that auction schemes that do not allow for retaliation against cartel tres-
passers should be considered to undermine cartel stability. Furthermore
the release of information about bidders, their submissions or the award
itself should be restricted as much as possible. Such information allows
cartel members to ascertain whether cheating has occurred and who
needs to be brought in line. Uncertainty about the reason for awarding
public procurement winners could, for example, remain to the extent
that products were awarded on the basis of best value for money and
random selection tender awarding rules. Such non-lottery-based winner
selection schemes require cartels to devise complicated allocation
schemes.
4. EMPIRICAL FINDINGS
Because of its heavy reliance on random variables of distribution which

are generally unknown to the auctioneer, the auction mechanism design
literature has been criticized for its lack of practical value.111 The focus of
theoretical auction literature on the sale of a single object to one of several
non-cooperative bidders has generated rich results but has encountered
difficulties when tested against the real world where bidders found col-
lusive behaviour attractive.112 Clearly using actual information from prac-
titioners is the only way to validate theory. This section reviews empirical
analysis which takes real world data as a basis to examine whether the
theory can be validated.
110 Ibid., 10.

111 Hendricks and Paarsch (1995), 404 ff.
112 Baldwin, Marshall and Richard (1997), 658.

There are a limited number of papers within the empirical auction litera-
ture which analyse the bidding patterns of convicted cartels and compare
them to non-cartel bidding behaviour.113 As well as their relevance for
identifying collusive bidding behaviour, they postulate three main find-
ings. The first is that cartel members bid less aggressively than non-cartel
members. Second, cartel member bids are more correlated than bids
of a control group.114 Third, collusion generates higher prices than the
non-collusive control group. In the absence of a cartel conviction or a
control group, Ishii presents evidence of collusion based on the occurrence
of bidding wars if non-local competitors participate in a procurement
auction.115
Other papers propose econometric tests, predominantly within an
independent private value framework, to detect collusive bidding.
After controlling for demand conditions in the timber industry, Baldwin,
Marshall and Richard116 test several models to determine if price
variations are best explained by variations in supply conditions or by
collusion. Porter and Zona117 propose that, in the absence of phantom
biddings, the parameters of a regression on the winning bidders should
be equal to the parameters obtained from a regression on the ranking of
all bidders.
For asymmetric independent private- and common-value auctions,
Bajari and Ye118 propose a test to determine whether in-auction bid
rigging did occur. Using insider information, they create a distribution of
firms cost structures and compare them with the distribution of submitted
bids. The existence of significant differences is interpreted as evidence of
collusion. Despite its intuitive appeal, its practical applicability is severely
constrained by data availability problems. Furthermore, if bidders suspect
that procuring entities are well informed about their cost structures,
participating in such a tender would be less attractive since the bidders
expected profits would be lower. To what extent knowledge about bidders
cost structures outperforms a larger number of participants in terms of the
procurement entitys revenue is subject to further research. Nevertheless,
it is certain that bidders have an intrinsic self-interest to undermine any
attempts to obtain information about their true values. For attempts to
113 See, for example, Porter and Zona (1993) and (1997); Pesendorfer (2000).
114 See, for example, Porter and Zona (1993), 528.
115 Ishii (2008).
116 Baldwin, Marshall and Richard (1997).
117 Porter and Zona (1993).
118 See Bajari and Ye (2001a) and (2001b). For a general discussion see Bajari
and Summers (2002).

derive such information from past bidding data, Feinstein, Block and
Nold119 show that cartel members who are aware that information is being
extracted have an incentive to systematically misinform the procuring
entity.120
Hence it can be concluded that there are effective opportunities to
detect cartels but that their applicability is complicated by problems of
data availability and the complexity of the research. Furthermore, the risk
of an ex post detection of a bid rigging cartel may not present a sufficient
deterrent for competitors to collude. This may, in turn, suggest that the
prevention of bid rigging conspiracies is crucial.
5. CONCLUDING REMARKS
The above treatment thus offers a number of insights that can be used by
procuring entities to obstruct the formation of bid rigging conspiracies.
From an auction theoretic point of view, procuring entities should (i)
limit exchanges of information during auctions; (ii) refrain from using
lottery-like allocation rules; (iii) encourage new entrants; (iv) require a
sufficiently large number of serious bidders to ensure competition; (v)
keep the identity of bidders secret and disclose information only very
sparingly; (vi) use reserve prices strategically; and (vii) last but by no
means least, use (auction) mechanism design to obstruct bid rigging
conspiracies.
Auction theory does not only offer advice to prevent the formation
of bid rigging conspiracies but also suggests techniques to undermine
the stability of such conspiracies should they be formed. As suggested
above, it is desirable to use auction schemes that do not allow for
retaliationagainst cartel violators. Also, in the context of cartel stabil-
ity, it is found that the release of information about bidders, their actual
bid submissions or the awarded contract should be restricted. Such
information allows cartel members to ascertain whether cheating has
occurred and which cartel members have to be forced into compli-
ance. Uncertainty about the reason for awarding public procurement
winners could still remain if products were awarded on the basis of best
value for money and random selection tender awarding rules. Such non-
lottery-based winner selection schemes force cartel members to design
119Feinstein, Block and Nold (1985).

120Ibid, 452, state three variables which are being applied: mean bids of cartel
members, variance of cartel bids and the number of long-run market suppliers.

and agree upon complicated allocation schemes. Such discretionary

rules will, of course, incur potential conflicts with administrative law
rules since they limit the predictability of institutional behaviour and
transparency.

PART 2
Legal analysis
This section of the book applies the economic theories presented above to
the European Union, China and Japan. Each jurisdiction is addressed in
turn. First, the laws addressing bid rigging conspiracies will be analysed
in terms of their effectiveness to prevent such cartels from forming. As a
result of this analysis varying degrees of under-deterrence are found.
The next chapter, in relation to each jurisdiction, examines in which
way auction theory and industrial economics can help to prevent bid
rigging conspiracies. With regard to Europe and China, auction theory
will be used; for Japan, industrial economics theory is used to examine the
particular area of the construction industry.

Europe
Among the most formidable objectives of the European Union (EU) is
the creation of the internal market. Dismantling obstacles to internal
trade between the Member States is achieved via the four freedoms and
competition law. In 2006 the European public procurement market had
an estimated size of 1,900 billion.1 Public procurement constitutes for a
significant part of the Member States GDP. The EU overhauled its public
procurement rules in 2004 and, despite its efforts to create a competitive
internal market, Member States buying remains largely national.
The national bias of public procurement may be indicative of weak
foreign competition and/or weak foreign participation in national tenders.
In either case the possibility increases that national competitors could
create and operate a bid rigging cartel. The absence of sufficient competi-
tion from other Member States therefore requires that particular attention
is placed on the detection of cartels and optimal punishment.
Chapter 5 examines whether EU law adequately addresses bid rigging
conspiracies on the basis of administrative fines. Criminal sanctions are
not available and would need to stem from national law. Other legal
issues relating to tort or contract law will fall under national law and will
therefore not be addressed here. After examining the issues of optimal
enforcement, Chapter 6 will contrast EU procurement law with auction
theoretic insights to determine in which ways economic theory could help
to undermine bid rigging conspiracies. A brief overview of the EU public
procurement law is given in Appendix 1.
1 IP/08/1971.
65

Bid rigging in the European Union
5. The effectiveness of the legal regime

applicable to bid rigging in the
European Union
1. INTRODUCTION
This chapter considers whether the European Union (EU) law applicable
to bid rigging conspiracies deals effectively with such infringements so that
procurement entities may buy at competitive prices. EU cartel law will
therefore be measured against the law and economics theory on optimal
enforcement. The chapter consists of two parts: the first presents the appli-
cable law; the second examines it from an economic perspective.
2. THE LEGAL FRAMEWORK APPLICABLE TO BID

RIGGING
The focus of this section rests on European competition law since it is

legislation at the EU level that covers cross-border bid rigging cartels. It
should be mentioned that public procurement in the EU is not an exclusive
competence of the EU, and also that some Member State legislation may
apply to bid rigging conspiracies. While national competition laws will
not be applicable where EU competition law applies, national laws are
relevant to the extent that they condemn the fraud element in bid rigging
conspiracies. Penal sanctions for fraud in the context of bid riggings exist
in some Member States but not at the EU level.
Since the enactment of the Lisbon Treaty the Union has acquired some
powers in criminal matters but economic crimes are not among those areas
listed (Article 83(1) TFEU). The Union is, however, empowered to extend
this list into areas of economic crime, provided that such measures are
necessary and prove essential to ensure the effective implementation of a
Union policy in an area that has been subject to harmonization measures.1
1 Treaty on the Functioning of the European Union (TFEU), Art. 83(2).
66

Bid rigging in the European Union 67
EU competition law prohibits cartels as being incompatible with the

common market. Article 101(1) TFEU forbids all agreements between
undertakings, decisions by associations of undertakings and concerted
practices which may affect trade between Member States and which have
as their object or effect the prevention, restriction or distortion of competi-
tion within the internal market.
A practice by bidding participants must thus satisfy several legal elem-
ents in order to be subsumed under Article 101(1). Undertakings, agree-
ments, the concept of object or effect, trade between Member States and
exemptions are examined, in turn, below.
2.1 Undertakings
Article 101 TFEU prohibits agreements between undertakings. Since the

Treaty is silent on the exact definition of an undertaking, the term has
been clarified by case law. In Hfner2 the European Court of Justice held
that any entity engaged in an economic activity, regardless of its legal
status and the way it was financed, amounted to an undertaking. An
economic activity is one that involves the offering of goods and services
on the market3 that could be provided by a private undertaking to earn
profits.4 It is irrelevant whether the organization was set up for an eco-
nomic purpose5 or if it is non-profit seeking,6 as is the nature of its legal
personality.7 Entities that fulfil an exclusively social function based on
2 Case C-41/90 Hfner and Elser v Macroton GmbH [1991] ECR I-1979, para.
21; Joined Cases C-159/91 and C-160/91 Poucet and Pistre [1993] ECR I-637, para
17; Case C-244/94 Fdration Franaise des Socits dAssurance and Others v
Ministre de lAgriculture et de la Pche [1995] ECR I-4013, para 14.
3 Case C-475/99 Ambulanz Glckner v Landkreis Sdwestpfalz [2001] ECR
8089. A foundation that does not engage in an economic activity directly can
still be qualified as an undertaking if it engages indirectly in economic activity
by being involved directly or indirectly in the management of an undertak-
ing. See Joined Cases T-208/08 and T-209/08, Gosselin Group NV and Stichting
Administratiekantoor Portielje v European Commission, Judgment of 16 June 2011,
nyr. para. 46 ff
4 Case C-67/96 Albany International BV and Stichting Bedrijfspensioenfonds
Textielindustrie, Judgment of 21 September 1999, nyr.

5 Case 155/73 Italy v Sacchi [1974] ECR 409.
6 Case 96-82 IAZ International Belgium SA v Commission [1983] ECR
3369, para. 58; Albany International BV and Stichting Bedrijfspensioenfonds

Textielindustrie, Judgment of 21 September 1999, nyr, para. 85.
7 Sporting bodies, trade associations and professional bodies have all been
held to fall within the framework of an undertaking within the meaning of Article
101 TFEU.

the principle of solidarity,8 and are entirely non-profit making,9 will not
constitute an undertaking.
2.2 Agreements
All agreements or concerted practices are caught by Article 101 TFEU.

The construction of these terms is deliberately broad. Agreements may be
oral, they do not require sanctioning mechanisms and do not need to be
legally binding. An agreement exists if there is consensus on a plan that
can limit commercial freedom.10 The precise form in which the meeting
of minds occurred is not important provided that it is an accurate expres-
sion of the parties intention.11 The mere presence of an undertaking
at a meeting with an anticompetitive object is sufficient to establish its
participation in a cartel unless it has publicly distanced itself from such
conduct.12 It is for the defendant to prove that such participation was
without any anticompetitive intention by demonstrating that it had indi-
cated to its competitors that it took part in such meetings with a spirit that
was contrary to theirs.13
But it is not only agreements that are caught by Article 101 TFEU.
Concerted practices require a less formal agreement. Parallel conduct
may be held to constitute a concerted practice if the parties cannot other-
wise explain the parallel behaviour.14 Submitted tenders that are not the
8 Joined Cases C-159/91 and C-160/91 Poucet and Pistre [1993] ECR I-637,
paras 1819; Case C-218/00, Cisal di Battistello Venanzio & Co v Istituto Nazionale
per LAssicurazione Contro Gli Infortuni Sul Lavoro (INAIL) [2002] ECR I-691,
paras 3146.
9 Joined Cases C-264/01, C-306/01, C-354/01 and C-355/01 AOK
Bundesverband v Ichthyol-Gesellschaft Cordes, Hermani & Co, Judgment of 16

March 2004, nyr, paras 51 and 57.
10 Craig and de Bmlautrca (2008), 955.
11 Case T-41-96 Bayer AG v Commission [2000] ECR II-3383, para. 68; Case
41/69 ACF Chemiefarma v Commission [1970] ECR 661, para. 112; Joined Cases
209/78 to 215/78 and 218/78 Van Landewyck and Others v Commission [1980] ECR
3125, para. 86.
12 See Case T-23/99 LR af 1998 A/S, Judgment of 20 March 2002, nyr, paras.
39 and 147; Case T-7/89 SA Hercules Chemicals NV v Commission [1991] ECR

II-1711, para. 232; Case T-12/89 Solvay v Commission [1992] ECR II-907, paras
98, 99 and 100; Case T-141/89 Trfileurope Sales SARL v Commission [1995] ECR
II-791, paras 85 and 86; Joined Cases T-67/00, T-68/00, T-71/00 and T-78/00, JFE
Engineering Corp. v Commission, Judgment of 8 July 2004, nyr, para. 327; Case
T-26/95 Cimenteries CBR (Cement) [2000] ECR II-491, paras 1353, 1389 and 3199.
13 Case C-199/92 P Hls v Commission [1999] ECR I-4287, para. 155.
14 See Joint Cases 29/83 and 30/83 Compagnie Royale Asturienne des Mines SA

result of individual economic calculation, but of knowledge that has been

improperly acquired and joint activity, will prevent competition or at least
distort and restrict it.15 It is therefore not surprising that the Court has
been condemning disclosure of information by competitors16 even where
it occurs after the tender17 as violating Article 101(1).
The Commission is under a duty to prove infringements of Article
101 TFEU with sufficient precise and consistent evidence.18 In the case
of infringement based on documentary evidence the burden of proof is
shifted to the defendant, which has to demonstrate that the evidence is
insufficient to establish an infringement, or other plausible explanation of
its conduct.19
The Commission may also (solely) rely on mutually confirmed state-
ments of undertakings which constitute direct evidence to establish an
infringement.20 The evidence viewed as a whole must be sufficiently
precise and consistent.21 Agreements between undertakings cannot be
rationalized on the basis of unsubstantiated economic reasoning where
such conduct would not have been followed in the absence of an
agreement.22
2.3 Object or Effect
The interpretation of the object or effect of an agreement spurs much debate.

Agreements can be anticompetitive in some aspects but pro-competitive
and Rheinzink GmbH v Commission of the European Communities, Judgment of 28

March 1984, part A, 1700 ff.
15 Re the European Sugar Cartel [1973] OJ L140/17, para. 42, cited in Jones
and Sufrin (2004), 802.

16 Case T-7/89 SA Hercules Chemicals NV v Commission [1991] ECR II-1711,
para. 217.
17 Case T-29/92 SPO v Commission [1995] ECR II-289, paras 122 and 123.
18 Joined Cases T-67/00, T-71/00 and T-78/00 JFE Engineering and Others
v Commission, Judgment of 8 July 2004, para. 179; Joined Cases C-89/85,

C-104/85, C-114/85, C-116/85, C-117/85 and C-125/85 to C-129/85 Ahlstm
Osakeyhti and Others v Commission (Woodpulp II) [1993] ECR I-1307, at I-445,
para 157.
19 Joined Cases T-67/00, T-71/00 and T-78/00 JFE Engineering and Others v
Commission, Judgment of 8 July 2004, para. 187.

20 Joined Cases T-236/01, T-239/01, T-244/01 to T-246/01, T-251/01 and
T-252/01 Graphite Electrodes case, nyr, Judgment of 29 April 2004, para. 431.
Commission, Judgment of 8 July 2004, para. 180 and case law contained therein.
Commission, Judgment of 8 July 2004, para. 184.

in others. Even though EU competition law does not adopt a rule of

reason as exists in US antitrust law, it still needs to arbitrate between
pro- and anticompetitive agreements. EU law first distinguishes between
an anticompetitive object and an anticompetitive effect.23
Even if the anticompetitive object is not the sole objective, the agreement
will still be held to be anticompetitive.24 If the object is anticompetitive,
there is no need to consider any anticompetitive effect.25 Agreements that
contain hardcore restrictions such as cartel agreements fixing prices, limit-
ing output or sales, and the allocation of markets or customers are gener-
ally considered to have the object of restricting competition.26 Bid rigging
would thus fall within this list.
If the object of an agreement is not anticompetitive, the effect of the
agreement is then examined.27 The anticompetitive nature of an agreement
is determined by its content, its object and its economic and legal context28
that is, the market and the context in which it operates is examined.29 An
analysis of the anticompetitive effect would therefore not be necessary in
the context of bid rigging cartels.
In Vlk, however, the Court extended the statutory requirements by
demanding that the agreement had to affect trade between Member States
23 Case 56/65 Socit Technique Minire v Maschinenbau Ulm [1966] ECR 234,
249.
24 Case C-551/03 General Motors BV v Commission [2006] ECR I-3173, para.
64; Joined Cases 56/64 and 58/64 Consten and Grundig v Commission [1966] ECR
299, 342; Case C-235/92 P Montecatini v Commission [1999] ECR I-4539, para.
122; Joined Cases C-238/99 P, C-244/99 P, C-245/99 P, C-247/99 P, C-250/99
P to C-252/99 P and C-254/99 P Limburgse Vinyl Maatschappij and Others v
Commission [2002] ECR I-8375, para. 491.
25 Case 56 and 58/64 Consten and Grundig [1966] ECR 299.
26 See Jones and Sufrin (2010), 171; Commission Notice on agreements
of minor importance which do not appreciably restrict competition under

Article 81(1) EC Treaty (de minimis), OJ C 368/13 2001, 22 December 2001,
point 11. Financial kickbacks (commissions) and cover quotes as practices
associated with bid rigging conspiracies have an anticompetitive object,
see Joined Cases T-208/08 and T-209/08, Gosselin Group NV and Stichting
Administratiekantoor Portielje v Commission, Judgment of 16 June 2011, nyr.,
paras 67, 73 and 74.
27 Case 23/67 Brasserie de Haecht SA v Wilkin [1967] ECR 407, 412.
28 Case C-209/07 Competition Authority v Beef Industry Development Society
Ltd and Barry Brothers [2008] ECR I-8637, paras 16 and 21; Joined Cases 29/83
and 30/83 Compagnie Royale Asturienne des Mines and Rheinzink v Commission
[1984] ECR 1679, para. 26; and Case C-551/03 P General Motors v Commission
[2006] ECR I-3173, para. 66.
29 Case 22/71 Bguelin Import Company v GL Import-Export SA [1971] ECR
949, para. 13.

and the free play of competition to an appreciable extent.30 An agreement

does not fall within 101 TFEU if it has only an insignificant effect on the
market, taking into account the weak position of the parties in the market.31
The Commission has described what it understands by an appreciable
effect on competition in its de minimis notice. An agreement that falls
beyond the de minimis thresholds is deemed to have an appreciable effect
on competition and will thus be illegal, unless it falls within one of the
new block exemptions on vertical agreements32 or one of the derogations
of Article 101(3) TFEU. Since the de minimis notice is not applicable to
hard core restrictions,33 it remains unclear for small bidders to determine
if their cartel falls within the ambit of EU competition law.34 Given the
Commissions limited resources it does, however, seem unlikely that the
Commission would be willing to take up cases where the market share
of the parties is very small.35 The Commission seems to be more likely to
accept that an agreement escapes Article 101 TFEU if it does not have an
appreciable effect on trade.36
2.4 Effect on Trade between Member States
The criterion of the effect of trade between Member States is a jurisdic-

tional matter and is interpreted broadly. EU law does not apply in purely
national situations.37 The 2004 Community guidelines on the effect on
30 Case 5/69 Vlk v Vervaecke [1969] ECR 295, para. 7, and Case 19/77 Miller
v Commission [1978] ECR 131, para. 7, following Case T-77/92 Parker Pen [1994]
ECR II-559, para. 26.
31 Case 5/69 Vlk v Vervaecke [1969] ECR 295.
32 Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the applica-
tion of Article 101(3) of the Treaty on the Functioning of the European Union to
categories of vertical agreements and concerted practices, OJ L 102/1, 23 April
2010.
33 Commission Notice on agreements of minor importance, above note 26.
34 It is worth mentioning that guidelines are not rules of law but of practice
from which the administration may not depart without stating reasons that are
Compatible with the principle of equal treatment: see Case C-397/03 P Archer
Daniels Midland Co v Commission [2006] ECR I-4429, para. 91. By deviating the
Commission runs the risk of suffering the consequences of being in breach of the
general principles of law, such as equal treatment or the protection of legitimate
expectations, see Joined Cases C-189/02P, C-202/02P, C-208/02P, C-213/02P
Dansk Rrindustri v Commission, Judgment of 28 June 2005, ECR I-5425, para 211.
35 See Faull and Nikpay (2007), para 3.158 ff, in particular 3.161 and 3.164.
36 See Jones and Sufrin (2008), 177.
37 See Guidelines on the Effect on Trade Concept contained in Articles 81 and
82 EC Treaty, [2004] OJ C 101/81, para 3.

trade concept contained in Articles 81 and 82 of the Treaty38 (now Articles

101 and 102 TFEU) provide the methodology and guidance to determine
if trade is affected. The guidelines require39 (a) a sufficient degree of prob-
ability on the basis of a set of objective factors of law or fact; (b) an influ-
ence on the pattern of trade between Member States; and (c) a direct or
indirect, actual or potential influence on the pattern of trade.
Appreciably is measured in turnover or on the basis of market
share.40 Agreements are not normally capable of affecting trade between
Member States to an appreciable extent if the undertakings have an
aggregate market share of less than 5 per cent and if the aggregate annual
Community turnover in the products covered by the agreement is less than
40 million. A case by case analysis is, however, essential. Since the guide-
lines apply also to hard core violations,41 the thresholds may lead to the
exclusion of small bid rigging cases from enforcement by the Commission.
The courts are not bound by the Commission thresholds and may apply
a broader interpretation of restricting trade between Member States. In
cases where the Commission is unwilling to initiate an investigation, a
private claimant may appear before a national court and initiate proceed-
ings on the basis of EU competition law or, in the alternative, rely on
national competition law.
2.5 Exemptions
Agreements that would be declared void under Article 101(2) TFEU

may be justified under Article 101(3) if they contribute to improving the
production or distribution of goods or to the promotion of technical or
economic progress, while allowing consumers a fair share of the resulting
benefit, provided they do not (a) impose on the undertakings concerned
restrictions which are not indispensable to the attainment of these objec-
tives; and (b) afford such undertakings the possibility of eliminating com-
petition in respect of a substantial part of the products in question.
Pursuant to the Commission guidelines on the application of Article
101(3) for an individual exemption of a bid rigging cartel, there must be
38 Ibid., para 3.
39 Ibid., paras 2543.
40 Ibid., para. 46. For determining the market share the Commission must specify
the relevant market. Exceptionally a detailed description can suffice. See Joined
Cases T-208/08 and T-209/08, Gosselin Group NV and Stichting Administratiekantoor
Portielje v Commission, Judgment of 16 June 2011, nyr. paras. 108, 111116, Case
T-199/08, Ziegler SA v Commission, Judgment of 16 June 2011, nyr., paras 6972
41 Ibid., para. 50.

efficiency gains (in the form of lower costs, new production methods, costs
savings, economies of scale or improvements in product quality).42 A fair
share of these benefits must be passed on to consumers,43 and the anticom-
petitive restrictions must be necessary and not lead to an elimination of
competition in respect of a substantial part of the products in question. It
is hard to imagine a case in which a bid rigging cartel will lead to efficiency
gains in which procuring entities will benefit. It is therefore hard to believe
that a bid rigging cartel would receive such an exemption.
Similarly, the block exemption regulations are unlikely to afford bid
rigging conspiracies a safe harbour since they generally do not apply to
hard core restrictions.44
The above can be summarized as follows. In the European Union
collusive tendering is outlawed as hard core cartels under Article 101(1)
TFEU.45 While the Court has stated that even hard core violations may not
fall within the ambit of Article 101(1) if they have an insignificant effect on
intra-community trade and/or competition,46 they cannot benefit from the
present Commission de minimis notice.47 Given that the Court has been pre-
pared to condemn cartels merely based on their anticompetitive object even
in the absence of any such effect,48 and has ruled that the Commission was
not obliged to demonstrate the presence of adverse effects on competition
to establish an infringement under Article 10149 in practice all bid rigging
42 See Commission Notice Guidelines on the Application of Article 81(3) of

the Treaty, OJ C 101/97, 27 April 2004, paras 64 ff.
43 Ibid., paras 85 ff.
44 Commission Regulation (EU) No. 330/2010, above note 32, Art. 4;
Commission Regulation (EC) No. 772/2004 of 27 April 2004 on the application

of Article 81(3) of the Treaty to categories of technology transfer agreements, OJ
L 123/11, Art. 4; Commission Regulation (EU) No. 461/2010 of 27 May 2010 on
the application of Article 101(3) of the Treaty on the Functioning of the European
Union to categories of vertical agreements and concerted practices in the motor
vehicle sector, OJ L 129/52, Art. 5; Commission Regulation (EU) No. 1217/2010
of 14 December 2010 on the application of Article 101(3) of the Treaty on the
Functioning of the European Union to certain categories of research and develop-
ment agreements, OJ L 335/36, Art. 5.
45 See Jones and Sufrin (2004), 790.
46 Ibid., 159, and C-5/69 Vlk v Vervaecke [1969] ECR 295, para. 5/7.
47 See Commission Notice on agreements of minor importance, above note
26, Art. 11(1).

48 See Case C-199/92 P, Hls AG v Commission [1999] ECR I-04287, paras
163 and 166; Case C-49/92 P Commission v Anic Partecipazioni SpA [1999] ECR
I-4125, para. 123; Joined Cases T-67/00, T-68/00, T-71/00 and T-78/00 JFE
Engineering Corp. v Commission, Judgment of 8 July 2004, paras 181 and 319.
49 Joined Cases T-67/00, T-68/00, T-71/00 and T-78/00 JFE Engineering Corp.
v Commission, Judgment of 8 July 2004, paras 382383; Case T-141/94 Thyssen

cases that have an appreciable effect on trade should be outlawed if enforce-

ment agencies are willing to commit scarce resources to convict them.
3. LAW AND ECONOMICS ASSESSMENT
3.1 Introduction
This section analyses whether the EU competition law applicable to bid

rigging conspiracies deals effectively with them so as to allow government
entities to buy at competitive prices.50 It considers whether the incentives
created are sufficient to induce bidders to comply with the law. The costs
of collusion and detection are thus evaluated on the basis of the law and
economics framework described above. Public and private enforcement
are examined in turn.
3.2 Public Enforcement
Fines, criminal sanctions, and detection and enforcement will be consid-

ered under this heading.
3.2.1 Fines
Despite the relative scarcity of legal decisions addressing bid rigging, it
appears that the Court is prepared to impose large fines51 that reflect the
deliberate nature, gravity and duration of bid rigging infringements.52
This suggests that fines under EU competition law are substantial.
Article 23(2) of Council Regulation (EC) 1/2003 envisages fines not
exceeding 10 per cent of the turnover of the entire undertaking during
the previous year. The European Commission guidelines on the method
of setting fines53 offer insights into how the Commission intends54 to
Stahl AG v Commission [1999] ECR II-347, para. 277, Case T-143/89 Ferriere Nord
SpA v Commission [1995] ECR II-917, paras 30 ff.
50 I am indebted to the participants of the conference Europe: From Nation
States to a State of Nations, Beijing University, Beijing (China) on 2123 May 2007
for their helpful comments.
51 See, for example, Case T-29/92 SPO v Commission [1995] ECR II-289, paras
377381.
52 See Jones and Sufrin (2004), 804; and T-23/99 LR af 1998 A/S, Judgment of
20 March 2002, nyr, paras 225 ff.

53 Guidelines on the method of setting fines imposed pursuant to Article 23(2)
(a) of Regulation 1/2003, OJ C 210/02, 1 September 2006.

54 Although in principle guidelines are binding upon the Commission see

fine55 bid rigging conspiracies. The basic fine for bid riggings qualified as
price-fixing or market-sharing agreements is a maximum of 30 percent of
the sales value of the cartelized goods in the relevant market during the
cartel period. The basic amount is multiplied by the number of years (or
half years) of participating in the infringement. In addition to the basic
fine and independently of the duration of the infringement, another 15 to
25 per cent of the determined sales value is levied to deter price-fixing or
market-sharing agreements.56 This requirement has been criticized for not
duly respecting the individual assessment of gravity required under the law
since cartels may not always be profitable.57
The basic fine is increased by 100 per cent for each repeated offence
of the same or a similar infringement. Fines are also increased for
cartel leaders, undertakings that have retaliated against those who
break the cartel agreement and undertakings that have obstructed
investigations.58
In order to ensure a sufficient deterrent effect, the Commission may
increase the fine for undertakings that enjoy a particularly large turnover.
The Commission will increase the fine to recoup all improperly gained
profits. It is, however, bound by the statutory maximum of 10 per cent of
the sum of the total turnover of an undertaking in the preceding business
year59 and must take the gravity and duration of the infringement into
account60 by way of an individual assessment.61
From a law and economics perspective there are a number of issues to
Joined Cases C-189/02P, C-202/02P, C-208/02P, C-213/02P Dansk Rrindustri v

Commission, Judgment of 28 June 2005, ECR I-5425, paras 209211 and Case
T-151/07 Kone Oyi et al. v Commission, Judgment of July 2011, nyr. para 34 ff.
the Commission reserves the right to deviate from them: see Guidelines on the
method of setting fines, ibid., recital 37.
55 The fines are of a non-criminal law character. See Council Regulation (EC)
No. 1/2003 of 16 December 2002 on the implementation of the rules on competi-

tion laid down in Articles 81 and 82 of the Treaty, Art. 23(5).
56 Guidelines on the method of setting fines, above note 53, recital 25.
57 Riley (2011), 553. In addition it needs to be pointed out that the Commission
must state reasons for setting the fine which enables the respondent to ascertain
the reasons for the adoption of the measure and the Court to exercise its review,
see Joined Case T-204/08 and T-212/08 Team Relocations NV et al. v Commission,
Judgment of 16 June 2011, nyr. para 99.
58 Guidelines on the method of setting fines, above note 53, para. 28.
59 Regulation 1/2003, Art. 23.
60 Ibid., Art. 23(3).
61 Joined Cases 100103/80 Musique Diffusion Franaise, 18311914, para.
129, available at http://curia.europa.eu/juris/showPdf.jsf?text5&docid590970&

pageIndex50&doclang5en&mode5lst&dir5&occ5first&part51&cid5689168.

be considered. These are related to (i) the level of the fine; (ii) the basis
used for setting fines; and (iii) repeated offences. Each is considered
below.
Level of fines Fines can clearly be significant for undertakings since they
can have a sizable effect on their financial positions, or at least their cash
flow, as they are intended to recoup all undue profits and serve as a deter-
rent. The maximum limit of 10 per cent of the turnover during one year
may be capable of producing a deterrent effect for undertakings that serve
several markets. In such a situation 10 per cent of one years turnover may
exceed depending on the duration of the cartel the anticipated cartel
profits. In a situation where a cartel member only serves the cartelized
market, 10 per cent of its turnover in one year may be significantly lower
than the basic fine envisaged by the guidance note and thus lead to
under-deterrence. Statistical findings support the conventional wisdom
that undertakings that pay a high percentage of their turnover in fines
are generally smaller and are usually single-product companies, while
undertakings with a multi-billion turnover pay a lower percentage of their
turnover in fines.62 This would seem to corroborate the above.
The degree of deterrence that the system of fines in the EU can achieve,
however, rests not only on the overall turnover of an undertaking and the
markets that it serves, but also on profitability. Lever points out that for
undertakings in the retail sector with a profit margin of 2.5 per cent, a 10
per cent fine on their turnover will be the equivalent of gains over four
years.63 If, by contrast, an undertaking in a different sector has a margin
of 30 per cent, a 10 per cent turnover will amount to only four months of
profits. The difference in profit margins may therefore have an important
effect on the perceived gravity of the fine, and hence a difference in its
deterrent effect.
A further problem associated with the 10 per cent turnover threshold is
that the ratio of installed capital to turnover can differ significantly across
sectors.64 If the turnover of an undertaking is much higher than its capital
a fine imposed on the basis of turnover could outstrip the total amount
of its capital. In such a situation the deterrent effect of the fine would be
limited since the undertaking would be able to pay only part of the fine.
This creates a so-called judgment proof problem in which actors are not
deterred from engaging in undesirable activities since they are unable to
62 Riley (2011), 555.

63 Lever (2007), 8.
64 Ibid., para. 5.

pay the additional fine they would be liable to pay. This may be mitigated
by the inability to pay provisions. In exceptional circumstances the
Commission may, upon request and based upon objective evidence that
imposition of the fine would irretrievably jeopardize the economic viabil-
ity of the trespasser and lead to a total loss of assets, take into account an
undertakings inability to pay.65
The additional increases in fines levied under the hard core provisions
lead to over-deterrence for cartels that do not enjoy sufficient mark-ups.
This inefficiency stems from the possibility that competition in the market
could be weakened if undertakings were to go bankrupt or find it difficult
to invest as a result of the possibility of high sanctions, although these neg-
ative effects could also be mitigated by the inability to pay provisions.
In order to assess whether the 10 per cent turnover threshold is too high
or low, the profitability of the cartels themselves must also be considered.
The variance in the reports of cartel profitability is large. Kroes suggests
that the average cartel overcharge is around 20 to 25 per cent.66 Connor
states that the median long-run overcharge for all types of cartel is 23.3
per cent.67 While the maximum fine of 10 per cent of the turnover in a
year would thus point to under-deterrence, Motta raises the question of
whether the current fines are not already so high that a further increase
may not be justifiable under considerations of proportional justice that
balance the gravity of the penalty against the seriousness of the infringe-
ment.68 In this light it is worth mentioning that Commission cartel sanc-
tions have been increasing under the 2006 guidelines but they have not led
to a more frequent application of the 10 per cent cap. During the period
20079 less than 9 per cent of the cartels benefited from the maximum fine
provision, while under the 1998 guidelines this figure slightly exceeded 9
per cent.69
Basis for levying fines There is considerable uncertainty as to the basis

on which the maximum of 10 per cent of turnover threshold is calculated.
There is no guidance as to the circumstances in which the Commission
65 See Guidelines on the method of setting fines, above note 53, point 35. For
its application in a bid rigging context see Joined Case T-204/08 and T-212/08
Team Relocations NV et al. v Commission, Judgment of 16 June 2011, nyr., para
171 ff. and Case T-199/08 Ziegler SA v Commission, Judgment of 16 June 2011,
nyr., paras 164 ff.
66 Kroes (2009).
67 Connor (2010).
68 Motta (2007), 9.
69 Connor (2011), 31.

will hold a parent company liable for the behaviour of its subsidiary.70
Depending on the degree of risk averseness of the perpetrator, this may
lead to over- as well as under-deterrence.
Repeat offenders The Commission has the right to increase, by up to 100

per cent, the fine for each repeated offence. Riley criticizes this provision on
three grounds.71 First, undertakings may be punished for repeated offences
even when a significant amount of time has passed between the offences;
the shareholders and/or management may have changed, and therefore
a repeat offender cannot be identified. Second, the fact of the repeated
offence and the threat of a heavier penalty are carried over to the new
owner. Third, it is unclear what is meant by same or similar infringement.
Rileys first and second criticisms address the longevity of the threat of
a repeated offence penalty for subsequent owners or managers who are
unconnected with the earlier infringements. Since it is the undertaking as a
legal person, rather than the shareholders or management, which is penal-
ized under EU law, a change of management or ownership is irrelevant for
determining whether there is a situation of repeated infringement. As long
as the legal entity remains in existence, it may be subject to increased fines.
Rileys criticism regarding the terminology of same or similar infringe-
ment is well taken. A bid rigging offence based on price fixing may
trigger an increase in the fine on the basis of the repeat offence clause if
it was preceded by a bid rigging cartel based solely on territorial grounds.
But this is not clear from a legal point of view. Depending on the risk
averseness of repeated offenders, they may be deterred from engaging in a
second offence. More clarity would help to improve the predictability of
the expected fines and thereby contribute to effective deterrence.
Summary Assessing the adequacy of fines for bid rigging offences is

important because the deterrence effect will depend on largely unknown
parameters such as profits, capital installed or cartel mark-ups. It can,
however, be suggested that for undertakings with high profits, operat-
ing in one line of business and serving one market, there is likely to be
under-deterrence since the basic fine alone would outstrip the statutory
10 per cent maximum. Similarly, for cartels of long duration the statutory
maximum may be reached without having recouped all undue profits.
There are only relatively few cases (around 9 per cent of the cases) in which
the statutory maximum fine is reached.
70 See Riley (2011), 558 ff.

71 Ibid., 558.

And yet it is in those cases, in particular, where detected infringements

produce results.
Deterrence works best when undertakings expect a negative result from
committing bid rigging offences. If the fines are too low to counterbalance
less than perfect detection, there is under-deterrence. Perpetrators should
be able to predict fines to avoid infringements.72 Predictability regarding
the ultimate level of fines is undermined by uncertainty regarding the
liability of parent companies for infringement by their subsidiaries and
by the lack of clarity as to which offences are treated as similar for the
purpose of repeat offences.
In general it can be concluded that in most cases fines can be levied in
such a way as to recoup improperly obtained bid rigging profits, although
in some cases fines could be higher for the purpose of deterring cartels.
While the fines do not appear to be overly high, one may wonder if they
have arguably reached a level where a focus on deterrence might be
preferable.73
3.2.2 Criminal sanctions

In those cases where monetary fines for bid rigging conspiracies do not
offer a sufficient level of deterrence, criminal sanctions should be consid-
ered. Even though the Commission has acquired criminal powers under
the Lisbon Treaty, European competition law is not yet enforced by
criminal sanctions. It is only in the area of fraud affecting the European
Unions financial interests that the legislator has asked Member States to
provide for criminal sanctions. Bid riggings affecting the Unions budgets
will thus be subject to criminal penalties.74 For all other bid rigging cases
criminal sanctions will stem exclusively from national law.
Since the entry into force of the Lisbon Treaty, pursuant to Article 83
TFEU, the Union may establish minimum rules concerning the definition
of criminal offences and sanctions in areas of serious crime with a cross-
border dimension such as terrorism, money laundering and corruption.
By means of a unanimous decision, and after obtaining the consent of the
European Parliament, the Council may identify other areas of crime. If
the approximation of criminal laws and regulations of the Member States
is essential to ensure the effective implementation of a Union competi-
tion policy in the area of bid rigging, minimum rules may be established
72 See Motta (2007), 10.

73 Ibid., 15.
74 Convention drawn up on the basis of Article K.3 of the Treaty on European
Union on the protection of the European Communities financial interests [1995]

OJ C 316, 27 November 1995, 4957.

pursuant to the special legislative procedure that requires the consultation

of the European Parliament.75
So far, however, there are no European rules and criminal sanctions will
be based on national law. The application of national substantive criminal
law provisions could be restricted by the parallel application of European
competition law provisions. Article 4 of the 7th Protocol of the European
Convention on Human Rights76 states that
no one shall be liable to be tried or punished again in criminal proceedings

under the jurisdiction of the same State for an offence for which he has already
been finally acquitted or convicted in accordance with the law and penal pro-
cedure of that State.
Similarly Article 50 of the Charter of Fundamental Rights of the

European Union77 states that
no one shall be liable to be tried or punished again in criminal proceedings for

an offence for which he or she has already been finally acquitted or convicted
within the Union in accordance with the law.
The ne bis in idem principle contained in the Charter of Fundamental

Human Rights is a fundamental right of the EU and has the same legal
value as the Treaties.78
To the extent that national criminal sanctions do not focus on carteliza-
tion but on the fraudulent element in submitting a rigged tender, there
should be no problem with dual punishment or double trials (ne bis in
idem) since they constitute different offences: (i) formation of a cartel and
(ii) fraud.79 Nor would it contravene Walt Wilhelm v Bundeskartellamt in
which the Court stated that parallel proceedings under Community and
national laws are permissible insofar as any later decision to fine takes
into account any fines already imposed on the same person in earlier
decisions.80
From a deterrence perspective, however, it should be noted that not
every Member State may have criminal provisions for fraudulent behav-
75 See TFEU, Arts 83(2) and 103.

76 Of 4 November 1950.
77 OJ C 364/01.
78 TEU, Art. 6. See also Wils (2003) for a more extensive examination.
79 This would thus not be in conflict with the ECHR judgment in App.
No. 37950/97 Franz Fischer v Austria, Judgment of 29 August 2001, para. 25.
80 Case 14/68 Walt Wilhelm v Bundeskartellamt [1969] ECR 1, para 11.

iour in the context of procurement tenders.81 The burden of proof regard-

ing the existence of damage incurred by the public entity may be very high.
Yet this problem can be circumvented, as is shown by the case of Germany.
Under the German Criminal Code (StGB) Submissionsbetrug (bid rigging)
falls under 263 StGB and is punished with up to five years imprisonment
or a fine. In serious cases, those that cause significant financial damage
or include abuse of power, sanctions can reach up to 10 years imprison-
ment. Because of the difficulties of the burden of proof regarding financial
loss, bid rigging may also be subsumed under 298 StGB as competi-
tion restricting agreements in procurements (Wettbewerbsbeschraenkende
Absprache bei Ausschreibungen). During the period 19982006 there were
on average 15 convictions82 under this provision. Since both 263 and 298
StGB apply to natural persons, the deterrence effect for decision makers
in undertakings may be positive.
Based upon the foregoing it can be summarized that criminal sanctions
are adjudicated on the basis of national law. It is unlikely that European
competition law will be reviewed to introduce criminal penalties,83
although perhaps, since Lisbon, the prospects are better than ever before.
Criminal sanctions at Member State level can be directed against natural
or legal persons and their deterrent effect must be assessed in conjunction
with the actual application of the sanctions by the courts. What can be
said here is that, at least in Germany, criminal sanctions for bid rigging
frauds are an existing threat and serve a deterrence function.
3.2.3 Detection and enforcement

European competition law is enforced by the European Commission as
well as the national competition authorities (NCAs) and national courts.84
NCAs advise the Commission of proceedings and before adopting deci-
sions, accepting commitments or withdrawing benefits of block exemp-
tions.85 They may not take decisions that conflict with a decision made by
the Commission;86 national courts are also bound by this rule.87 Both the
Commission and the NCAs may submit observations to the courts.88 That
81 For an account of criminal sanctions regarding competition law violations

in various Member States, see Wils (2005), 51.
82 Achenbach (2009) 171.
83 Motta (2007), 11.
84 See Regulation 1/2003, above note 55, Arts 46.
85 Ibid., Arts 1112.
86 Ibid., Art. 16(2).
87 Ibid., Art. 16(1).
88 Ibid., Art. 15(3).

the Commission assumes the function of guardian of the Treaty can also
be inferred from the fact that it can assume competence in cases dealt with
at the national level89 and that it receives information on the application
of competition law from Member States and NCAs. The Commission,
however, takes full account of the Advisory Committee composed of rep-
resentatives of the NCAs.90
National competition authorities cooperate closely91 and discuss cases
within the European Competition Network. If one NCA is investigating
a case, the other NCAs are obliged to, and the Commission may, suspend
proceedings or reject complaints.92 This system of parallel jurisdiction
does not create rights or expectations for an undertaking to be able to
choose the enforcement authority.
Regulation 1/2003 allows the Commission to impose behavioural and
structural remedies as well as fines,93 and grants it extensive investigatory
powers.94 To support these powers the Commission may impose fines not
exceeding 1 per cent of the total annual turnover on undertakings for, inter
alia, supplying incorrect or misleading information, supplying incomplete
records during inspections, refusing to submit to an inspection, giving
incorrect or misleading answers, or tampering with affixed seals.95 The
Commission thus enjoys extensive powers and is supported by NCAs so
as to increase the overall resources that can be deployed to enforce EU
competition law.
With regard to public enforcement of competition law a number of
issues must be examined. These are related to enforcement errors, the
detection of violations and the investigation backlog.
Enforcement errors The European Commission could be said to embody

investigative, prosecutorial and adjudicative functions and could, as a
result, suffer from biases that increase the likelihood of error costs in com-
parison with a judge-based system that retains an independent adjudica-
tive function.96 Wils builds upon psychology literature to outline what he
89 Ibid., Art. 11(6).

90 Ibid., Art. 14.
91 Commission Notice on Cooperation within the Network of Competition
Authorities [2004] OJ C101/43.

92 Regulation 1/2003, above note 55, Art. 13(1).
93 Ibid., Arts 1722, 7 and 23 ff.
94 Ibid., Chapter V. On the relation between Member State and Commission
enforcement powers see Wils (2011).

95 For a complete list see Regulation 1/2003, above note 55, Art. 23(1).
96 This section is based on Wils (2004).

terms prosecutorial bias. He contends, first, that competition enforce-

ment agencies may believe that an infringement is likely to occur in an
industry and then target it, which in turn confirms rather than challenges
this belief (confirmation bias). Second, officials may be unwilling to
draw conclusions that challenge their former beliefs or conclusions (hind-
sight bias). This can be explained on psychological lines but also by the
desire to justify past decisions to superiors. Third, competition authorities
may wish to show a high level of enforcement so that enforcement errors
are made and fines are potentially too high.
In light of such biases and the risks of enforcement errors, it might be
desirable for the Commission to defend its cases before the EU courts.
The potential increase in accuracy may, however, come with the draw-
back of higher enforcement costs and lead to delays in concluding cases.
This is perhaps why the Commission has chosen to mitigate the negative
effects by introducing a peer review system, although if criminal sanctions
were to be introduced into EU competition law error costs would prob-
ably be higher and would merit adjudication before a court.97 In any event
the defendant is able to have the case reviewed before the courts.
Detection Detecting infringements of illicit cartels is difficult. Making

use of cartel insiders in proving bid rigging violations has an intuitive
appeal. The leniency policy98 encourages undertakings involved in cartels
to pass on information about their infringements to the competition
authorities in return for total immunity or a reduction in the fines they face
upon conviction. By offering incentives to whistle blowers, secret cartels
are detected and penalized the societal benefits outweigh the interests of
society in fining a cartel member.99
Where the Commission has insufficient evidence to find an infringe-
ment, it grants immunity from fine if the undertaking provides substantial
new evidence that will lead to the finding of an infringement and the
carrying out of an inspection. The undertaking must continue to cooper-
ate genuinely.100 An undertaking that forces others to join or remain in the
cartel is not eligible for a total waiver, but may still enjoy a reduction in
the amount of the fine.101
The Commission will grant reductions to undertakings that offer
97 Slater, Thomas and Waelbroeck (2008), 36.

98 Commission Notice on immunity from fines and reduction of fines in cartel
cases [2006] OJ C 298/17, 8 December 2006.
99 Ibid., para. 3.
100 Ibid., see II.A.
101 Ibid., para. 13.

significant value added to the evidence already in the Commissions pos-

session. The first undertaking to come forward with this information may
obtain a 30 to 50 per cent reduction, the second one 2030 per cent, and
any subsequent undertaking a 20 per cent reduction. One of the innova-
tions of the 2006 leniency notice is the marker system that allows an
applicant the opportunity to prepare the necessary information for the
Commission while reserving its place in the queue. It thereby intensifies
the competition to file for leniency.
The leniency policy is a tremendous success in that it contributes to the
Commissions backlog of cases,102 although it has not led to a significant
reduction in the Commissions average case handling period.103 More than
half of the cartel cases decided between 2005 and 2008 were initiated by
a leniency application.104 Criticism regarding the current leniency policy
concerns (i) the risk of civil liability, in particular with regard to additional
EU civil proceedings; (ii) the uncertainty regarding the evidence standards
required for leniency applications; and (iii) in the context of the marker
system, its discretionary nature which may deter whistle blowers.105 Riley
also suggests that an Amnesty Plus scheme offering additional fine
reductions to undertakings under cartel investigations if they present infor-
mation on additional cartels in which they are involved could help the
Commission to roll up cartel formations across several connected markets.
Other issues, such as when one cartel member gives information to
one NCA but the case is eventually handled by another NCA with
no (or lower) leniency policies, have been addressed by the European
Competition Networks design of a model leniency policy.106 Similarly,
whistle blowers are protected from EU civil liability by making their cor-
porate statement protected from discovery.107
Backlog As suggested above, there appears to be a backlog of cases

that the Commission is unable to handle in a timely fashion. Clearly, the
Commission is restrained by its limited resources and it seeks to employ
these in an efficient manner, this implies the targeting of grave infringe-
ments while less serious infringements may be penalized later or go unpun-
ished if the Commission decides not to take up the case. The flipside of this
102 Riley (2010), 194.

103 Motta (2007), 4.
104 Chalmers, Davies and Monti (2010), 936.
105 See Riley (2010), 195.
106 Chalmers, Davies and Monti (2010), 936.
107 Commission Notice on immunity from fines and reduction of fines in cartel
cases, above note 98, paras 32 and 33.

is that minor infringements may not merit the scarce resources and remain
uninvestigated and hence not penalized. To mitigate the backlog and to
reduce the investigative burden, the Commission introduced the settlement
procedure108 in 2008. Undertakings under investigation benefit from a 10
per cent reduction in the fine in addition to reductions under the leniency
notice if they reach a settlement with the Commission. Undertakings
must acknowledge their liability for the infringement, give an indication
of the maximum fine they will accept, agree to a shorter investigatory
procedure and forgo the right of access to the Commissions file. Their
statements may be recorded orally to prevent discovery by private parties.
Since the first time this procedure was applied was in mid-2010,109 there
is little experience on the question of whether the procedure alleviates the
Commissions work sufficiently to allow it to target more serious as well
as less serious infringements.
Summary The Commission enjoys extensive investigatory powers and

can coerce compliance during investigations. It is supported by NCAs so
that the resources available to enforce EU competition law are substantial.
In light of efficiency considerations the Commission seeks to target large
cases that cause particular detriment to society. Discoveries of bid rigging
cartel infringements are generally difficult but are facilitated by imperfect
yet successful leniency policies. In order to address the resulting backlog of
cases, the Commission has introduced settlement procedures that should
free resources for investigations.
While it is yet too early to assess the success of the settlement proce-
dures, what is apparent from the above is that there is rightly so strong
enforcement against serious cases. Enforcement against less serious cases
may be more limited. If there is indeed such an enforcement bias, there
would be under-deterrence regarding less serious infringements. This, in
turn, implies that private enforcement must serve as an important comple-
ment to public enforcement.
3.3 Private Enforcement
The Court recognized in its 2001 Courage judgment that the effectiveness
of competition law would be undermined if any victim of an infringement
of Article 101 TFEU even if party to a cartel agreement could not claim
108 Commission Regulation 622/2008 of 30 June 2008, OJ L 171/3 amending

Regulation 773/2004, Art. 10(a).
109 IP/10/586 of 19 May 2010.

damages.110 The Court further recognized that private enforcement could

make a significant contribution to the maintenance of effective competition
in the Union,111 but that it was for national law to prevent parties to illicit
agreements from being allowed to benefit from their unlawful conduct.
The European Commission is keen to develop civil actions for damages
as a mechanism for enforcing competition law,112 but enforcement at
present remains predominantly public in nature. The 2004 study by inter-
national law firm, Ashurst, found that private competition law enforce-
ment levels through damages claims in Europe are very low and that there
is total underdevelopment of EU competition law damages actions and
an astonishing diversity in the Member State jurisdictions.113
Regulation 1/2003 does not directly encourage private damages actions
under EU competition law114 and subsequent Commission activities have
identified obstacles to private enforcement but not yet resolved them.115
The Commission Green Paper116 identified the following impediments
to private enforcement of EC competition law: (i) access to evidence, (ii)
damages and procedural costs, (iii) the passing-on defence, (iv) the stand-
ing of indirect purchasers, and (v) the interaction with public enforcement.
In its 2008 White Paper the Commission makes several suggestions to
improve private enforcement. Suggestions include, inter alia, collective
and opt-in redress, minimum standards of disclosure, the binding effect of
final decisions of national competition authorities for civil procedures, a
clarification of the (rebuttable) fault standards, and reductions in costs for
damages actions.117 Since then the Commission has commissioned a study
on quantifying antitrust damages118 and held public consultations on the
Quantification of Harm Caused by Infringements of the EU Antitrust
Rules and Towards a Coherent European Approach to Collective
Redress.
Given that the Commission has not made significant progress in facili-
110 Case C-453/99 Courage Ltd v Bernard Crehan [2001] ECR I-6297, paras 24
and 28.
111 Ibid., para. 26. See also Joined Cases C-295/04 Vincenzo Manfredi v Lloyd
Adriatico Assicurazioni SpA, C-296/04 Antonio Cannito v Fondiaria Sai SpA,

C-297/04 Nicolo Tricarico, and C-298/04 Pasqualina Murolo v Assitalia Spa [2006]
ECR I-6619.
112 Craig and de Brca (2010), 1009.
113 Ashurst (2004).
114 Camesasca and Van den Bergh (2006), 328.
115 See Cauffman (2010), 1082 ff for an overview.
116 COM(2005) 672, 19 December 2005.
117 COM(2008) 165 of 2 April 2008.
118 Oxera et al. (2009).

tating private enforcement under competition law, redress for loss incurred
will stem from national law. In the context of bid rigging conspiracies,
victims can rely on several alleys. They could rely on contract law and seek
damages, claim unjust enrichment, or ask the public prosecutor to initiate
proceedings for fraud and become a civil party to the trial. The latter may
alleviate the procuring entity from much of the legal challenges it faces.
In summary, the current prospects for civil damages are still remote but
this is expected to improve over time.119 Without the support of the public
prosecutor a procuring entity suffering from bid rigging would have, first,
to prove by itself that a cartel convicted under EU law was also operating
during its (competitive) procurement tender, and then to establish how
much damage it was incurring. Since the burden of proof may be high,
access to information may be restricted, and convictions by national
competition authorities may carry different weight before national courts,
incentives for procuring entities to bring private damage claims may be
limited. Depending on the legislation of the particular Member State, it
may be expected, therefore, that there will be under-deterrence for bid
riggings.
4. CONCLUSION
This chapter has analysed whether the EU law deals effectively with bid
rigging conspiracies. Enforcement against bid rigging is predominantly a
public affair in that most enforcement is carried out by the Commission or
the national competition authorities.
Public enforcement is also based predominantly on financial penalties
and not on criminal sanctions. Criminal sanctions only enter the scene via
national legal systems. The fines that may be levied under EU law appear
to be sizable enough to recoup the unlawful bid rigging profits of detected
cartels in many cases. The level of deterrence obviously will depend on
the level of profit margin that particular undertakings enjoy, the duration
of the cartel, and also on the degree of detection and enforcement. At the
moment in most cases the statutory maximum fine is employed in less
than 10 per cent of the cases. It appears therefore that the level of fines
should be adequate in many cases and prevention of bid rigging conspira-
cies should be achieved by other means. It bears mentioning, however,
that this finding contrasts with Connor and Lande120 who, based on an
119 Riley (2010), 195.

120 Connor and Lande (2006).

examination of 500 refereed journals, papers and books, find that the
average cartel overcharge is 31 to 49 per cent (with a median of 22 to 25 per
cent). While the true detection rate, of course, is unknown, Connor states
that only about 10 to 30 per cent of cartels are discovered and punished.121
This would suggest that the level of fines in the EU is too low.
One way to deter such cartels is by enhancing detection and enforce-
ment. Here it is noticeable that the European legislator has provided the
Commission with extensive investigatory powers. Since the Commission
is reinforced by national competition authorities to enforce EU competi-
tion law, the resources available for enforcement should be sizable. In
light of efficiency considerations, the Commission seeks to target large
cases that cause particular detriment to society. Discoveries of bid rigging
cartels, although generally difficult, are facilitated by imperfect yet suc-
cessful leniency policies. In order to address the resulting backlog of cases
the Commission has introduced settlement procedures that should free
resources for investigations.
Since the detection rate of bid rigging cartels is not known and fines are
not used to the maximum in most cases, criminal sanctions could become
a useful tool in mitigating the degree of under-deterrence in those cases
where fines are insufficient.
Unfortunately private enforcement under EU competition law is, at
this stage, not a pathway from which additional support for competition
law enforcement is likely to stem. In particular, in the context of small
bid rigging cartels that are not sizable enough to draw attention from the
Commission, private enforcement would be needed.
In conclusion, it appears that the EU law addressing bid rigging con-
spiracies is designed reasonably well if public enforcement is indeed doing
a good job. With regard to very large infringements where the level of fine
reaches the statutory maximum, criminal penalties would be a useful tool
in mitigating under-deterrence. Similarly, in cases where public enforce-
ment does not choose to take action, private parties are at present unlikely
to take action and this, therefore, gives rise to under-deterrence. With
regard to the question of whether the level of fines in the EU is sufficient,
this will, of course, depend on the level of profitability of a particular
industry and the likelihood of detection of a cartel. If industries that enjoy
higher profits are not subject to more investigations and hence also higher
detection rates (provided that the propensity to collude is equally distrib-
uted among different industries), there will be under-deterrence in the EU.
121 Connor (2008), 13.

6. Application of auction theory in
Europe
1. INTRODUCTION
The previous chapter has shown that law and economics theory sug-
gests that EU legislation is not perfectly designed to prevent bid rigging
conspiracies. This chapter analyses how far the Public Sector Directive
(Directive 2004/18/EC)1 follows auction theoretic insights in order to
determine if there are ways in which auction theory could help to prevent
cartel formation and stability.
2. EU LAW AND CARTEL FORMATION
This section examines how far the European public procurement legisla-
tion under Directive 2004/18/EC follows auction theoretic insights and
how it facilitates the formation of bid rigging cartels. In line with the dis-
cussion of auction theory in Chapter 4, the issues reviewed in this section
will encompass winner determination and the distribution of auction
proceeds, new entrants and the auctioneers response.
2.1 Winner Determination and the Distribution of Auction Proceeds
Auction theory suggests obstructing the exchange of information during

the bidding process to prevent in-auction signalling so that bidders are
unable to negotiate a cartel agreement via the tendering process. Bidders
can, of course, find other ways in which to announce their conduct but
this would then fall within competition law rather than procurement law.
In-auction signalling does not appear to be an issue for tenders
that employ the open procurement procedure because contracts will be
awarded after the bid opening stage without providing opportunities to
react within the framework of the procedure itself.
1 A description of the Public Sector Directive is included in Appendix 1.
89

As is the case with open procedures, restricted procedures are also used
frequently since both are default procurement procedures,2 which take pri-
ority over negotiated procedures and competitive dialogues. Unlike open
procedures, restricted procedures are not a single step procedure.3 Under
a restricted procedure, only bidders who have indicated their interest in
submitting a tender may be invited by the tendering authority to submit a
bid. The tendering authority invites at least five parties4 from those who
have indicated their interest to submit bids. Since a single step procedure
is employed for the actual award, there are no opportunities for signalling
within the actual procedure.
Furthermore, dynamic procurement procedures, such as competitive
dialogues or negotiation procedures with or without prior publication of a
contract notice, do not offer bidders the opportunity to negotiate a cartel
agreement during the tender process. In competitive dialogue procedures
tenderers individually discuss the contract details with the tendering
authority and each tenderer submits a bid on the basis of its own position.
In the case of negotiated procedures, tenderers negotiate the terms of the
advertised contracts. On the basis of the legal text neither procedure sug-
gests that bidders are able to exchange information during the tendering
process and, as a result, signalling does not appear to be possible.
In the case of framework contracts where successful bidders are eligible
to compete for subsequent procurement contracts with each other, the
sending of signals is conceivable. Such an exchange of information could,
for example, take place at the bid opening stage and convey information
for subsequent contracts. While information contained in the actual bid
submission might qualify as signalling within the procurement procedure,
the exchange of information between the competitors present at the bid
opening procedure itself may best be conceptualized as falling within
competition rules. In-auction signalling in this situation would be success-
ful if the signal contained in the tender submission gives rise to unilateral
actions that would result in a collective profit maximizing strategy. Unlike
multi-unit auction frameworks where conduct of other bidders may be
readily observable, this is not the case for framework agreements because
each procurement contract is based on a single step procedure.
Dynamic purchasing systems allow bidders to modify their bid submis-
sions up to the closure of the tendering procedure. Since bid submissions
2Directive 2004/18/EC, Art. 28(2).

3See Frenz (2006), 919, for the use of this distinguishing feature.
4 The number of invited bidders can also be fewer than five: see Directive
2004/18/EC, Art. 44(3).

Application of auction theory in Europe 91
are only opened after the deadline, no exchange of information, and thus
no signalling, is possible. This is different in the case of electronic auc-
tions. Here bidders are at least able to determine their relative rankings at
any stage of the auction process and the number of competitors may be
announced.5 It is forbidden to reveal the identity of bidders, although for
the purpose of in-auction signalling it is sufficient to be able to identify
bidders by means of the particular numbers of their bid. The Directive is
not sufficiently detailed to forbid the use of such techniques. Thus, in the
framework of electronic auctions, in-auction signalling may be an issue.
Auction theory suggests that tendering entities should not select winners
by lottery schemes. They should rely on secret or arbitrary criteria to
undermine cartel enforcement and cartel stability. Cartel formation is also
hampered in that it requires cartel members to devise complex contract
allocation schemes in order to distribute cartel proceeds. It should be
noted, however, that such practices go against the underlying procurement
principles of openness and transparency. Given the nature of administra-
tive law, it is, of course, not surprising that the degree of transparency and
predictability is high under EU public procurement legislation.
The CJEU has described the purpose of EU public procurement leg-
islation as averting the risk, whenever contracting authorities award a
contract, of preference being given to national tenderers or applicants. The
aim is also to avoid the possibility that a body financed or controlled by
the state, regional or local authorities or other bodies governed by public
law may choose to be guided by considerations other than economic
ones.6 In keeping with the Courts understanding that public procurement
legislation is directed towards the furtherance of the internal market7 and
5 Directive 2004/18/EC, Art. 54(6).

6 Case C-18/01 Korhonen [2003] ECR I-5321, para. 52; Case C-380/98
University of Cambridge [2000] ECR I-8035, para. 17; Case C-470/99 Universale-
Bau and Others [2002] ECR I-11617, para. 52; Case C-373/00 Truley [2003] ECR
I-1931, para. 42; Case C-237/99 Commission v France [2001] ECR I-939, para. 42;
Case C-44/96 Mannesmann [1998] ECR I-73, para. 33; Case C-360/96 Gemeente
Arnhem and Gemeente Rheden v BFI Holding BV [1998] ECR I-6821, paras 4243;
Case C-283/00 Commission v Spain [2003] ECR I-11697, para. 92.
7 The Court states that Directives 92/50, 93/46 and 93/37 which taken as a
whole constitute the core of EU law on public contracts are intended to achieve
similar objectives in their respective fields and that there is no reason to give a
different interpretation to provisions which fall within the same field of EU law
and have substantially the same wording. See Case C-244/02 Kauppatalo Hansel
Oy v Imatran Kaupunki [2003] ECR I-12139, paras 3435, and Case C-513/99
Concordia Bus Finland [2002] ECR I-7213, paras 9091. Consequently former
case law falling under any of these directives is cited below. Case law concerning
public procurement and the internal market/four freedoms: Joined Cases C-20/01

the fostering of competition,8 all relevant EU principles are cited in the

preamble to the Public Sector Directive. These include the principle of
free movement of goods, establishment and services and, derived from
them, the principles of equal treatment,9 non-discrimination,10 mutual
and C-28/01 Commission v Germany [2003] ECR I-3609, para. 60; C-26/03 Stadt
Halle and RPL Recyclingpark Lochau GmbH v Arbeitsgemeinschaft Thermische
Restabfall und Energieverwertungsanlage TREA Leuna [2005] ECR I-00001, para.
46; Case 199/85 Commission v Italy [1987] ECR 1039, para. 12; Case C-176/98
Holst Italia [1999] ECR I-8607, para. 23; Case C-389/92 Ballast Nedam Groep
[1994] ECR I-1289, para. 6; Case C-19/00 SIAC Construction [2001] ECR I-7725,
para. 32; Case C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 32; Case
C-92/00 Hospital Ingenieure Krankenhaustechnik Planungs GmbH [2002] ECR
I-5553, para. 43; Case C-380/98 University of Cambridge [2000] ECR I-8035, para.
16; Case C-59/00 Bent Mousten Vestergaard [2001] ECR I-9505, para. 21; Case
C-373/00 Truley [2003] ECR I-1931, para. 41; Case C-470/99 Universale-Bau and
others [2002] ECR I-11617, paras 51 and 89; C-237/99 Commission v France [2001]
ECR I-939, para. 41; Joined Cases C-285/99 and C-286/99 Impresa Lombardini
SpA Impresa Generale di Construzioni v ANAS [2001] ECR I-9233, para. 34; Case
C-399/98 Ordine degli Architetti delle Province di Milano e Lodi and Others [2001]
ECR I-5409, para. 52.
8 Case C-214/00 Commission v Spain [2003] ECR I-4667, para. 53; Joined
Cases C-21/03 and C-34/03 Fabricom SA v Belgian State [2005] ECR I-1559, para.
26; Case C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 81; Joined
Cases C-285/99 and C-286/99 Impresa Lombardini SpA Impresa Generale di
Construzioni v ANAS [2001] ECR I-9233, para. 35; Case C-27/98 Fracasso and
Leitschutz [1999] ECR I-5697, para.26; Case C-470/99 Universale-Bau and others
[2002] ECR I-11617, para. 89; Case C-247/02 Sintesi SpA [2004] ECR I-9215,
para. 35; Case C-243/89 Commission v Denmark [1993] ECR I-3353, para. 33; Case
ECR I-5409, paras 52 and 75; Case C-31/87 Beentjes [1988] ECR I-4635, para. 21.
9 Case C-19/00 SIAC Construction [2001] ECR I-7725, paras 3334; Case
C-243/89 Commission v Denmark [1993] ECR I-3353, para. 33; Case C-87/94
Commission v Belgium [1996] ECR I-2043, para. 54; Case T-183/00 Strabag Benelux
v Council [2003] ECR I-135, para. 39; Joined Cases C-21/03 and C-34/03 Fabricom
SA v Belgian State [2005] ECR I-1559, paras 26 and 29; Case C-513/99 Concordia
Bus Finland [2002] ECR I-7213, para. 81; Case C-458/03 Parking Brixen GmbH
[2005] ECR I-8585, para. 48; Case C-470/99 Universale-Bau and Others [2002]
ECR I-11617, paras 91 and 93; Case C-315/01 GAT [2003] ECR I-6351, para. 73;
Case C-448/01 EVN and Wienstrom [2003] ECR I-14527, para. 47; Case C-92/00
Hospital Ingenieure Krankenhaustechnik Planungs GmbH [2002] ECR I-5553, para.
45; Case C-331/04 ATI EAC and Others [2005] ECR I-10109, para. 22.
10 Case C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 63; Joined
Cases C-20/01 and C-28/01 Commission v Germany [2003] ECR I-3609, para. 62;
Case C-275/98 Unitron Scandinavia [1999] ECR I-8291, para. 29; Case C-264/03
Commission v France [2005] ECR I-8831, para. 32; Case C-324/98 Telaustria and
Telefonadress [2000] ECR I-10745, paras 6061; Case C-92/00 Hospital Ingenieure
Krankenhaustechnik Planungs GmbH [2002] ECR I-5553, para. 47; Case C-59/00

recognition, proportionality and transparency.11 Jurisprudence developed

by the Court plays a central role in limiting the freedom of contracting
authorities to address public concerns through the design of award criteria
that violate the above principles.12 While the above holds true for public
works contracts, public supply contracts and public service contracts,13 the
legislator has attributed a special position to economic entities operating
in the water, energy, transport and postal service sector.14 In light of the
closed nature of the markets in these sectors and the frequent existence of
special and exclusive rights, the legislator refers only to the principles of
equal treatment, non-discrimination, mutual recognition, proportionality
and transparency.15
Given the numerous legal principles listed above, it can be concluded
that the EU legislator envisages a transparent and non-discretionary
procedure. Therefore, if one focuses on cartel formation, the EU public
procurement legislation is to be criticized from a law and economics
perspective. Given the object and purpose of administrative law this is, of
course, hardly surprising.
Cartels do not only rely on bidder selection criteria to distribute cartel
proceeds. They can also rely upon subcontracting. Under the European
legislation contracting authorities may ask, or may be required by leg-
islation of Member States, to require bidders to indicate any share of a
contract they may intend to subcontract to third parties and any proposed
Bent Mousten Vestergaard [2001] ECR I-9505, para. 20; Case C-243/89 Commission
v Denmark [1993] ECR I-3353, paras 33, 3740, 45; Case C-225/98 Commission v
France [2000] ECR I-7445, para. 50; Case C-31/87 Beentjes [1988] ECR I-4635,
paras 2930; Case C-458/03 Parking Brixen GmbH, [2005] ECR I-8585, para. 48.
11 See Directive 2004/18/EC, recital 2 and Arts 2 and 3. See Telaustria and
Telefonadress [2000] ECR I-10745, paras 6062; Case C-87/94 Commission v

Belgium [1996] ECR I-2043, para. 54. For case law addressing preferential treatment
of economic operators by contracting authorities see Case C-87/94 Commission v
Belgium, ibid., para. 56; Case T-19/95 Adia Interim SA v Commission [1996] ECR
I-321, paras 42 and 47. More specifically for the principle of transparency see
Case C-275/98 Unitron Scandinavia [1999] ECR I-8291, para. 31; Commission v
Spain [2003] ECR I-4667, para. 53; Case C-19/00 SIAC Construction [2001] ECR
I-7725, para. 41; Case C-92/00 Hospital Ingenieure Krankenhaustechnik Planungs
GmbH [2002] ECR I-5553, para. 45; Case C-324/98 Telaustria and Telefonadress,
ibid., paras. 6162; Case C-421/01 Traunfellner [2003] ECR I-11941, para. 29;
Case C-458/03 Parking Brixen GmbH [2005] ECR I-8585, para. 49; Case C-470/99
Universale-Bau and Others [2002] ECR I-11617, para. 92.
12 See Directive 2004/18/EC, recital 3.
13 As addressed in Directive 2004/18/EC.

subcontractors.16 It appears, therefore, that the tendering authority will

be informed of the amount that may be subcontracted but may not know
to whom it is to be subcontracted. Bidding rings are thus able to distrib-
ute money among each other without close supervision by the tendering
authority. This is not desirable from a law and economics perspective
since it facilitates cartel formation. On a positive note, however, it should
be mentioned that the procurement process allows tendering entities to
restrict subcontracting in respect of the performing of essential parts
of a contract where the authority is unable to verify the capacity of the
subcontractor.17
2.2 New Entries
Auction theory suggests that successful cartels need to control new entries
to ensure profitability through pre-auction entry deterrence and optimal
cartel member selection. While strategies are addressed below on how pro-
curing entities can increase the number of bidders, this section examines
the calling off of procurement tenders where the number of bidders is too
low, and entry deterrence.
European public procurement law prescribes that the minimum
numbers of bidders for a restricted procurement procedure is to be five.
In the case of competitive dialogues and negotiated procedures with prior
advertisement the minimum number is three.18 If fewer bidders fulfil the
selection criteria, the procuring entity may proceed with the tender, but
is not obliged to. It can also discontinue or withdraw an award proce-
dure.19 Since the Directive only requires that candidates and tenderers
are informed as soon as possible and are given the grounds for taking the
decision not to conclude a framework agreement or a contract,20 case law
offers some insights.
The Court has held that a decision not to award a contract put out to
tender is limited to exceptional cases, or it must necessarily be based on
16 Directive 2004/18/EC, Art. 25, but also Art. 48(2)(i).

17 C-314/01 Siemens AG Oesterreich, ARGE Telecom & Partner und
Hauptverband der oesterreichischen Sozialversicherungstraeger [2004] ECR I-2549,
para. 47.
18 Directive 2004/18/EC, Art. 44(3).
19 It should be noticed that only withdrawals of tenders are allowed, not
a change of the award criteria: see C-448/01 EVN and Wienstrom [2003] ECR
I-14527, para. 95.
20 Directive 2004/18/EC, Art. 41(1).

serious grounds.21 It has also ruled that there is no implied obligation on

a contracting authority to carry the award procedure to a conclusion.22
Withdrawals of tenders have been permitted when there was only one suit-
able tender,23 or when a withdrawal became necessary as a result of errors
committed by the contracting authority itself.24 Yet it is equally clear that
a contracting authoritys decision to withdraw an invitation to tender
must be open to a review procedure.25
The above thus suggests that a procuring entity may stop a tendering
procedure if competition is threatened. This is positively evaluated from a
law and economics perspective.
In the presentation of auction theory, (pre-)auction entry deterrence
and inhibition strategies such as signalling, reputation building or price
limiting have been discussed. Such strategies may not give rise to anti-
competitive concerns if they reflect normal business conduct, and may be
seen as being much closer to the area of competition law than to public
procurement law. It is therefore not surprising that EU procurement laws
do not appear to regulate this issue. Yet inhibition strategies under EU
competition law would be qualified as abusive practices. Abuse requires
dominance in the relevant market. If the relevant market is not held to
constitute the relevant procurement market, dominance may not be estab-
lished. Consequently entry deterrence practices would go unpunished, at
least as far as EU law is concerned. Unless there are national competition
21 C-244/02 Kauppatalo Hansel Oy v Imatran Kaupunki [2003] ECR I-12139,

para. 29. Yet contrary to this, in C-27/98 Metalmeccanica Fracasso SpA [1999]
ECR I-5697, paras 2425, it states that the contracting authoritys option not to
award a contract put out to tender or to recommence the tendering procedure
is not subject to the requirement that there must be a serious or exceptional
case. This contradiction is extended to other public procurement directives by
the Courts finding that Directives 92/50, 93/36 and 93/37 constitute the core of
Community law and that there is no reason to give a different interpretation to
them: see Kauppatalo Hansel Oy v Imatran Kaupunki, ibid., paras 3435, C-513/99
Concordia Bus Finlandia [2002] ECR I-7213, paras 9091.
para. 30; C-92/00 Hospital Ingenieure Krankenhaustechnik Planungs GmbH [2002]

ECR I-5553, para. 41. In more general terms, see T-203/96 Embassy Limousines &
Services v European Parliament [1998] ECR II-4239, paras 5455.
23 C-27/98 Metalmeccanica Fracasso SpA [1999] ECR I-5697, para. 33.
para. 36.
25 See Directive 89/665, Art. 1(1); C-26/03 Stadt Halle and RPL
Recyclingpark Lochau GmbH v Arbeitsgemeinschaft Thermische Restabfall und

Energieverwertungsanlage TREA Leuna [2005] ECRI-1, para. 32; C-92/00 Hospital
Ingenieure Krankenhaustechnik Planungs GmbH [2002] ECR I-5553, paras 5455.

laws to contain such unfair business practices, procurement entities may

find themselves confronted with an unduly low number of serious bidders.
This is undesirable from a law and economics perspective.
2.3 The Auctioneers Response
As shown in Chapter 4 relating to auction theory, there are several

strategies that procuring entities can use to undermine bid rigging
cartels. They can limit disclosure of information, set reserve prices, seek
to increase the number of bidders, and employ auction design. Each is
considered below.
In order to form a successful cartel, bidders need to identify other
bidders. Even information on the number of bidders can be important.
The identity of bidders is generally safeguarded in most procurement
procedures. In the case of framework contracts, however, this is not the
case if bidders have been present at the bid opening, and bidders will
thus know their competitors for subsequent tenders under the framework
contract. Criticism can also be raised with regard to the electronic auction
procedure. While here the identification of the bidders is forbidden, the
announcement of the number of bidders participating in each round is
permissible.26 This can alter bidding behaviour.
Moreover, candidates and bidders are informed as to the success and
failure of participation in a tender.27 Relevant information concerning
the selected bid and the name of the successful bidder, together with the
reasons for rejecting the unsuccessful application, is given upon request28
in order to enable tenderers to defend their rights and to enable the Court
to exercise its supervisory powers.29
To enable competitors to safeguard their rights, they may be provided
with information that enables cartel members to identify who has been
violating a cartel agreement. From the viewpoint of complicating cartel
formation, it may be desirable to limit the amount of information that is
afforded to bidders. Of course, it bears mentioning that affording bidders
the opportunity to defend their rights is important for building trust in the
26 Directive 2004/18/EC, Art. 54(6).

27 Directive 2004/18/EC, Art. 41.
28 Directive 2004/18/EC, Art. 41(2).
29 See Case T-19/95 Adia Interim SA v Commission [1996] ECR I-321, paras
3132; Case T-166/94 Koyo Seiko v Council [1995] ECR II-2129, para. 103; Case
T-169/00 Esedra v Commission [2002] ECR II-609, para. 192; Case T-183/00
Strabag Benelux v Council [2003] ECR I-135, paras 5457; Case T-4/01 Renco v
Council [2003] ECR II-171, paras 9295.

administration and transparency of tendering procedures, which in turn

may lead to a higher number of serious bidders participating in tenders.
In addition to new entrants, reserve prices also have an impact on
bidding behaviour. Reserve prices or bidding ceilings may limit the ability
of cartels to inflate the costs of procurement tenders. Keeping their exist-
ence secret allows procuring entities to use them as a tool to undermine
bid rigging cartels. Directive 2004/18/EC is, however, silent on the per-
missibility of such ceiling prices other than the general publication of the
contract value. Using bidding ceilings in addition could, however, lead
to a reduction in the procurement costs and hence to a destabilization of
bidding cartels.
The number of bidders also influences bidding behaviour and thus the
possibility to form a cartel. The larger the number of actual and potential
competitors, the more difficult it is to form a cartel. The reasons for this
are straightforward. First, reaching a cartel agreement requires more
complex negotiations between all members, which is thus more difficult.
Second, the expected pay-offs of cartel membership are lower if cartel
proceeds must be shared with more members. Procuring entities should
therefore seek to increase the number of serious bidders. There are several
ways in which the number of bidders can be influenced: (i) in the publica-
tion of the tender, (ii) the costs of submitting tenders, (iii) national bias,
and (iv) the treatment of consortia. Each is discussed in turn.
To ensure the development of effective competition in the field of
public procurement, notices of procurement contracts that exceed certain
monetary thresholds30 have to be advertised throughout the Union,31
containing the relevant information and criteria32 to enable operators to
determine if they are of interest.33 Adopting the Common Procurement
Vocabulary34 and standard notice contracts fosters additional clarity.35
It should be noted that the principle of non-discrimination applies to all
stages of the tendering procedure36 and that the transparency principle
30 See Directive 2004/18/EC, Art. 7.

31 Directive 2004/18/EC, recital 36.
32 Directive 2004/18/EC, Art. 36(1) and Annex VIIA.
33 In Case C-31/87 Beentjes [1988] ECR I-4635, paras 3334, the Court held
that notices must contain at least some mention of the specific conditions that a
contractor must meet in order to be considered suitable for a tender. Eligibility
considerations are discussed below in more detail.
34 See Regulation 2195/2002/EC of the European Parliament and the Council
[2002] OJ L 340/1.
35 Directive 2004/18/EC, recital 36; Directive 2004/18/EC, Arts 36(1) and
77(2).
36 Case C-16/98 Commission v France [2000] ECR I-8315, para. 107.

even though it does not require the execution of a tendering procedure

seeks to ensure access to appropriate information for foreign economic
operators.37
Contracting authorities must make prior notification as soon as pos-
sible after the beginning of the financial year for supplies and services that
are intended to be awarded during the following twelve months, with an
estimated total value of the contract or framework agreement of at least
750,000.38 They may do this either through the Commission or through
their buyer profile39 on their respective home pages.40
While products are to be notified in conformity with the Common
Procurement Vocabulary terminology, services are to be categorized
in accordance with Annex II A.41 Similarly, construction contracts or
framework agreements in excess of the specified thresholds42 specified in
Article 7 (and taking account of Article 9) have to be notified as soon as
the decision is taken to approve the planning of the project. Publication of
these information notices is, however, only obligatory if the time limit for
the receipt of tenders is shortened.43
For the purpose of public contracts or framework agreements with
open, restricted and negotiated procedures with publication, competi-
tive dialogues or dynamic purchasing systems, contract notices are to
be used. Publication of procurement notices, including those relating
under the accelerated procedure,44 is conditional upon notification by
the Commission.45 Such notification is subject to particular formats and
methods of transmission,46 must contain compulsorily and uncondition-
ally required information,47 and is published by the Commission in the
official Union language chosen by the contracting authority, no later
37 Case C-231/03 Consorzio Aziende Metano (Coname) v Comune di Cingia de
Botti [2005] ECR I-7287, para. 21.

38 See Directive 2004/18/EC, Art. 35(1)(a) and (b). Arts 7 and 9 of the same
Directive are to be taken into account.

39 In such a case the contracting authority must send the Commission an elec-
tronic notice in accordance with the format and detailed procedures indicated in
point 3 of Annex VIII. See Directive 2004/18/EC, Art. 35(1).
40 See Directive 2004/18/EC, Art.35(1) and point 2(b) of Annex VIII.
41 Ibid., Art. 35(1)(a) and (b).
42 Ibid., Art. 7. Art. 9 must be taken into account.
43 Ibid., Arts 35(1) and 38(4); Case C-225/98 Commission v France, above note
10, para. 38.

44 See Directive 2004/18/EC, Art. 38(8).
45 Ibid., Art. 37(5).
46 Ibid., Art. 37(2) and Annex VIII, para. 3.
47 Case C-359/93 Commission v Netherlands [1995] ECR I-157, para. 20.

than five days after the notification has been sent to the Commission.48
Summaries are available in other official languages.
EU legislation thus employs a number of measures that seek to reduce the
information costs for firms. This is achieved not only by wide dissemination
of information but also through standardization of formats and procedures.
A second element that has an important bearing on the number of
serious bidders in a procurement tender is the associated cost of preparing
a tender. Standardization, or a list of acceptable documents, may help to
reduce the cost of submitting tenders.
According to Article 44 of Directive 2004/18/EC contracts may only
be awarded on the basis of specific criteria,49 and only to those economic
operators that are not excluded on the grounds of misconduct50 or their
unsuitability to pursue the professional activity.51 Additional criteria for
eligibility to submit tenders52 relate to financial and economic standing,
professional and technical knowledge and ability, as referred to in Articles
47 to 52 of Directive 2004/18/EC, and, where appropriate, criteria con-
tained in transparent rules on non-discrimination.53
Minimum capacity requirements concerning financial and economic
standing, professional and technical knowledge and ability of the
candidate which are related and proportionate to the subject matter
of the contract can be established54 by the contracting entity.55 Bank
48 If the format and methods of transmission are not complied with, the notice
must be published within 12 days and, in the case of the accelerated procedure,
within five days.
49 As laid down in Directive 2004/18/EC, Arts 53 and 55. For a discussion see
Bovis (2007) Ch. 10 and Frenz (2006), Ch. 13.

50 Directive 2004/18/EC, Art. 45. Candidates will be excluded on the grounds
of participation in a criminal organization, corruption, fraud and money launder-

ing. They may be excluded in the event of bankruptcy, on being wound up or
subject to proceedings for declaring bankruptcy, on being convicted for profes-
sional conduct, having been guilty of grave professional misconduct proven by the
contracting authorities, failing to fulfil social security obligations or to pay taxes,
or in the case of misrepresentation of information.
51 Ibid., Art. 46.
52 It should be emphasized that examining the suitability of contractors to
participate in an award procedure is logically separable from the award procedure

itself. The former deals strictly with the capability to fulfil the (capacity) require-
ments of the contract, while the latter seeks to determine the winner of the contract.
Yet this does not bar contracting authorities from conducting both examinations
in parallel: see Case C-31/87 Beentjes [1988] ECR I-4635, paras 1517 and Case
C-315/01 GAT [2003] ECR I-6351, para. 59.
54 Ibid., Art. 44.
55 In Joined Cases 27 to 29/86 SA Constructions et Enterprises Industrielles

statements, insurances against risks, balance sheets, statements of turn-

over, and other documents may be used to constitute valid proof offinan-
cial and economic standing.56 Subcontracting and the formation of
consortia are also permissible means to prove the capacity requirements.57
The Court has held that contracting entities may request references other
than those expressly mentioned in the Directive to assess the financial and
economic standing of candidates.58
The technical and professional ability of economic operators is assessed
on the basis of a wide range of accepted documents and indicators.59
Operators established in another Member State may be asked to present
only those documents that are listed in the Directive.60 Here, too, subcon-
tracting and the formation of consortia are expressly permitted.61 The EU
legislator thus seems to have considered the importance of limiting the
costs of submitting a tender. This is evaluated positively from a law and
economics perspective.
Another issue that may limit the number of potential bidders relates to
national biases in public procurement laws. National bias could lead to the
limitation of foreign competition and thus limit serious bidders, and is a
particularly grave issue in a context such as the EU in which the Member
States seek to establish a competitive internal market.
The purpose of EU public procurement legislation has been described
by the Court as averting both (i) the risk of preference being given to
national tenderers or applicants whenever a contract is awarded by the
contracting authorities, and (ii) the possibility that a body financed or con-
trolled by the state, regional or local authorities or other bodies governed
(CEI) and Others [1987] ECR 3347, para. 13, and in Case C-31/87 Beentjes [1988]
ECR I-4635, para. 17, the Court of Justice clarified that the purpose of the two
criteria is to determine the references or evidence which may be furnished in order
to establish the contractors financial and economic standing and technical knowl-
edge or ability.
56 Directive 2004/18/EC, Art. 47(1).
57 Ibid., Art. 47(2) and (3). Rules about the composition of groups of contrac-
tors are a matter for the Member States: see Case C-57/01 Makedoniko Metro
[2003] ECR I-1091, para. 61.
58 Directive 2004/18/EC, Art. 47(5); Case 76/81 Transporoute [1982] ECR
I-417, paras 910 and 15; Joined Cases 27 to 29/86 SA Constructions et Enterprises
Industrielles (CEI) and Others [1987] ECR 3347, paras 89, 13.
59 Directive 2004/18/EC, Art. 48(2).
60 Ibid., Art. 48(1). See also Case 76/81 Transporoute [1982] ECR I-417, para.
15; C-225/98 Commission v France [2000] ECR I-7445, para. 88.

61 Directive 2004/18/EC, Art. 48(3) and (4). Rules about the composition
of groups of contractors are a matter for the Member States: see Case C-57/01
Makedoniko Metro [2003] ECR I-1091, para. 61.

by public law may choose to be guided by factors other than economic

considerations.62 In keeping with the Courts understanding that public
procurement legislation is directed towards the furtherance of the internal
market63 and the fostering of competition,64 no national bias is permissible
under EU public procurement law except under special derogations. On
62 Case C-18/01 Korhonen [2003] ECR I-5321, para. 52; Case C-380/98
University of Cambridge [2000] ECR I-8035, para. 17; Case C-470/99 Universale-
Bau and Others [2002] ECR I-11617, para. 52; Case C-373/00 Truley [2003] ECR
I-1931, para. 42; Case C-237/99 France v Commission [2001] ECR I-939, para. 42;
Case C-44/96 Mannesmann [1998] ECR I-73, para. 33; Case C-360/96 Gemeente
Arnhem and Gemeente Rhedenv BFI Holding BV [1998] ECR I-6821, paras 4243;
Case C-283/00 Commission v Spain [2003] ECR I-11697, para. 92.
63 The Court of Justice states that Directives 92/50, 93/46 and 93/37, which
taken as a whole constitute the core of EU law on public contracts, are intended
to achieve similar objectives in their respective fields and that there is no reason
to give a different interpretation to provisions which fall within the same field of
EU law and have substantially the same wording: see Case C-244/02 Kauppatalo
Hansel Oy v Imatran Kaupunki [2003] ECR I-12139, paras 3435 and Case C-513/99
Concordia Bus Finland [2002] ECR I-7213, paras 9091. Consequently, former
case law falling under any of these directives is cited below. Case law concerning
public procurement and the internal market/four freedoms includes: Joined Cases
C-20/01 and C-28/01 Commission v Germany [2003] ECR I-3609, para. 60; Case
C-26/03 Stadt Halle and RPL Recyclingpark Lochau GmbH v Arbeitsgemeinschaft
Thermische Restabfall und Energieverwertungsanlage TREA Leuna [2005] ECR
I-1, para. 46; Case 199/85 Commission v Italy [1987] ECR 1039, para. 12; Case
C-176/98 Holst Italia [1999] ECR I-8607, para. 23; Case C-389/92 Ballast Nedam
Groep [1994] ECR I-1289, para. 6; Case C-19/00 SIAC Construction [2001] ECR
I-7725, para. 32; Case C-513/99 Concordia Bus Finland [2002] ECR I-7213, para.
32; Case C-92/00 Hospital Ingenieure Krankenhaustechnik Planungs GmbH [2002]
ECR I-5553, para. 43; Case C-380/98 University of Cambridge [2000] ECR I-8035,
para. 16; Case C-59/00 Bent Mousten Vestergaard [2001] ECR I-9505, para. 21;
Case C-373/00 Truley [2003] ECR I-1931, para. 41; Case C-470/99 Universale-Bau
and Others [2002] ECR I-11617, paras 51 and 89; Case C-237/99 Commission v
France [2001] ECR I-939, para. 41; Joined Cases C-285/99 and C-286/99 Impresa
Lombardini SpA Impresa Generale di Construzioni v ANAS [2001] ECR I-9233,
para. 34; Case C-399/98 Ordine degli Architetti delle Province di Milano e Lodi and
Others [2001] ECR I-5409, para. 52.
64 Case C-214/00 Commission v Spain [2003] ECR I-4667, para. 53; Joined
Cases C-21/03 and C-34/03 Fabricom SA v Belgian State [2005] ECR I-1559, para.
26; Case C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 81; Joined
Cases C-285/99 and C-286/99 Impresa Lombardini SpA Impresa Generale di
Construzioni v ANAS [2001] ECR I-9233, para. 35; Case C-27/98 Fracasso and
Leitschutz [1999] ECR I-5697, para. 26; Case C-470/99 Universale-Bau and Others
[2002] ECR I-11617, para. 89; Case C-247/02 Sintesi SpA, [2004] ECR I-9215,
para. 35; Case C-243/89 Commission v Denmark [1993] ECR I-3353, para. 33; Case
ECR I-5409, paras 52 and 75; Case C-31/87 Beentjes [1988] ECR I-4635, para. 21.

the basis of EU legislation, national bias should not constitute a problem

from a law and economics perspective.
Bidders may form a consortium in order to offer a better product to
a tendering entity. Permitting consortia can thus increase the number of
serious bidders if the individual consortium members by themselves are
unable to submit a bid.
Directive 2004/18/EC generally allows procuring entities to assess finan-
cial and economic standing (Article 47), technical and professional ability
(Article 48), and other requirements (Articles 4952) in order to determine
the suitability of an economic operator. Whether or not a consortium
member must be able to comply with the full scope of the financial require-
ments or with just a subset is not expressly stated in the Article on financial
standing. Recital 45 of the Directive, however, clarifies that the question
of whether a consortium member must command the necessary funds to
be held jointly and severally liable is a question of national rather than EU
law. If consortia are required to be able to assume joint and several liability,
they may not be able to include smaller companies. It could thus be feared
that in certain situations consortia are excluded from taking part in public
tenders. This should be prevented from a law and economics perspective.
Not only information disclosure, setting of reserve prices and the
number of sincere bidders can be addressed by procurement entities but
also auction design itself. Auction theory suggests that there is no one
hat fits all mechanism design that delivers perfect results in all situa-
tions; tailor-made solutions are desirable in specific cases. In the context
of Directive 2004/18/EC, variety in terms of mechanism design may enter
into the context of electronic auctions. Here, specific stipulations provide
for the application of mathematical formulae that help to determine the
automatic rankings of bid submissions (Article 54(6)). This implies that
different auction designs may indeed be permissible. Similarly, different
auction closing rules are described in Article 54(7). From a law and eco-
nomics perspective, this is desirable.
2.4 Summary
The above law and economics treatment suggests that there are areas
where European public procurement appears to be following general
auction theoretic insights, while there are areas where the formation of bid
rigging cartels is facilitated.
With regard to winner determination and the distribution of auction
proceeds, there are several issues that could be identified from a law and
economics perspective to facilitate cartel formation. In-auction signalling
is generally not an issue under European law but could be problematic in

electronic auctions, while in framework contracts it is less problematic. The

high degree of transparency and predictability of the procurement laws in
the EU not surprisingly do not provide for arbitrary selection criteria. While
this criticism is a common feature of procurement regimes, the treatment
of subcontractors could be improved. Under EU law procuring entities can
ask to be advised of the amount that bidders intend to subcontract but are
not, however, fully informed as to the identity of the subcontractors. Cartel
rings can thus use subcontracting as a means to distribute cartel proceeds.
With regard to new entrants, it was found that the rules governing
tender withdrawals appear to be adequate. Entry deterrence strategies are
not addressed by procurement law but fall under European competition
law. Unless dominance in the relevant market is established in the pro-
curement market, such strategies will remain undeterred unless there are
national competition law rules that apply to such strategies.
Regarding the auctioneers response, a number of deficiencies of
the European legislation have been identified that give rise to law and
economics concerns. A greater than necessary amount of information is
divulged in some of the European tender procedures. This is undesirable
from an economic perspective. In the context of framework contracts, for
example, bidders identities will be known if bidders were present at the
bid opening procedures. Furthermore, procuring entities are allowed to
reveal the number of bidders in electronic auctions.
Moreover, the EU legislation is silent on the use of reserve prices even
though auction theory predicts that they could undermine cartel formation.
On the other hand, the legislator duly minimizes the information costs of
bidders and recognizes the importance of increasing the number of serious
bidders. It also seeks to prevent national biases and does not appear to dis-
criminate against smaller undertakings in a consortium. That the EU legis-
lator has been more sensitive to information costs is readily understood if it
is remembered that the European Union consists of 27 sovereign Member
States that all have their own administrative idiosyncrasies in 23 different
official languages. Similarly, the EU legislator has taken into account the
cost of submitting tenders in designing its rules on the eligibility of docu-
ments. Given the overarching object of establishing an internal market in
the EU, it is not surprising that the element of national bias is, at least de
jure, not an issue in the EU. It bears mentioning, though, that procurement
in the EU is still very much a national affair despite EU-wide tenders.
It is estimated that only 13 per cent of public contracts publicized in the
EUs Official Journal are awarded to bidders from other Member States.65
65 Schonberg (2011).

Regarding the treatment of consortia, some Member State legislation pre-

scribes joint and several liability. This is to be critically evaluated from a law
and economic perspective.
3. EU LAW AND CARTEL STABILITY
After having analysed the insights offered by law and economics to public
procurement entities with regard to cartel formation, this section examines
how the European legislator addresses cartel stability. Here the previously
identified issues of sanctioning and detection will be examined from an
auction theoretic perspective.
Within the framework of the European public procurement rules, in-
auction sanctioning is not supported. The public procurement procedures
are either single step procedures or, if they are dual step procedures,
the closure rules do not allow for retaliation. Retaliation against cartel
renegades may be an issue, however, in framework agreements and in
electronic auctions.
In framework agreements a closed set of bidders are competing with
each other for a series of contracts. After winning the framework agree-
ment the identity of these bidders may be made known. Bidders are
therefore expecting to interact repeatedly with each other. In such situ-
ations penalizing cartel renegades will be possible in future tenders. The
effectiveness of such retaliatory measures is, of course, inferior to retali-
atory measures that allow taking action against cartel renegades within
the framework of the very same tender where the cartel agreement was
broken. Such in-auction sanctioning may be possible during electronic
auctions. The provisions on electronic auctions are not very elaborate and
appear to rely on national law. It is clear, however, that bidders will always
be able to determine their relative ranking during an electronic auction.66
This means that, in principle, retaliation is possible as long as bids can be
submitted.
For sanctioning of cartel renegades to be possible, cartel members
must first identify the renegade. As already mentioned, following the
conclusion of a tender there is a high degree of transparency under the EU
legislation that makes possible identification of violations. It is intended to
safeguard the legal position of unsuccessful candidates. Relevant informa-
tion regarding the selected bid, the name of the winning bidder and the
reason for the rejection must be provided upon request by the tendering

authority.67 While this is, of course, desirable from an administrative law

perspective, the degree of transparency exceeds the level desirable from
a law and economics perspective. For both framework contracts and
electronic auctions, cartel members can detect renegades. In the case of
framework contracts, cheating is detected only after the closure of one
tender, while for electronic auctions depending on the type of auction
mechanism used detection can be immediate.
In addition to the degree of transparency, there is another point of
critique that is closely related to the object and purpose of administrative
law, which favours cartel stability. From a public procurement perspec-
tive, winner selection criteria should be open and transparent in order to
prevent corruption. From a law and economics perspective, it has been
argued that winner selection criteria should be arbitrary and unpredict-
able. The rationale is that selection criteria based on subjective environ-
mental or health standards make the detection of cartel renegades more
difficult. More difficult detection implies that the likelihood of sanctions
decreases and hence cartel renegades have more incentives to violate the
cartel agreement.
According to EU law, however, contracts must be awarded to the eli-
gible candidate who has submitted the most economically advantageous
tender in accordance with clear,68 objective69 and coherently employed70
criteria. Such criteria must be mentioned in the contract documentation or
the notice of tender,71 must relate to the subject matter72 of the contract,
67 Ibid., Art. 41(2).

68 All reasonably well informed and normally diligent tenderers should be
able to interpret the criteria in the same way: see Case C-19/00 SIAC Construction
[2001] ECR I-7725, paras 4142; Case C-448/01 EVN and Wienstrom [2003] ECR
I-14527, paras 52 and 57.
69 Case C-27/98 Fracasso and Leitschutz [1999] ECR I-5697, para. 31; Case
C-247/02 Sintesi SpA [2004] ECR I-9215, para. 37; C-448/01 EVN and Wienstrom
[2003] ECR I-14527, para. 48.
70 Case C-19/00 SIAC Construction [2001] ECR I-7725, paras 4344; Case
C-87/94 Commission v Belgium [1996] ECR I-2043, paras 8889; Case C-448/01
EVN and Wienstrom [2003] ECR I-14527, paras 48 and 93.
71 Case C-87/94 Commission v Belgium [1996] ECR I-2043, para. 89; Case
C-225/98 Commission v France [2000] ECR I-7445, para. 51; Case C-19/00 SIAC
Construction [2001] ECR I-7725, para. 40; Case C-470/99 Universale-Bau and
Others [2002] ECR I-11617, para. 98; Case C-331/04 ATI EAC and Others [2005]
ECR I-10109, para. 21; Case C-421/01 Traunfellner [2003] ECR I-11941, para. 30;
Case T-4/01 Renco v Council [2003] ECR II-171, para. 66.
72 Case C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 59; Case
C-448/01 EVN and Wienstrom, [2003] ECR I-14527, para. 66; Case C-331/04
ATI EAC and Others [2005] ECR I-10109, para. 21. Yet it should be noticed that

and be presented with a relative weighting,73 or at least ranked in descend-

ing order of importance.74 On a more general note, contract criteria
should be aimed at identifying the most economically advantageous sub-
mission75 and effectively limiting the discretion of the contracting authori-
ty.76 In the alternative to the economically most advantageous tender,
tenders may also be awarded simply on the basis of the lowest price.77
Whichever benchmark is used, it is clear that the evaluation criteria used,
as with any other national measure, must comply with the principle of
non-discrimination and be subject to EU law and the objectives of the
Directive.78
criteria used to identify the economically most advantageous tender do not have
to be purely financial since other factors may influence the value of a tender: see
Concordia Bus Finland, ibid., para. 55; Case T-4/01 Renco v Council [2003] ECR
II-171, para. 67. It appears, though, that contracting authorities do enjoy a wide
discretion in assessing the factors to be considered when deciding to award a
contract. Moreover the Courts review is limited to examining if there has been a
serious and manifest error: see Case T-19/95 Adia Interim SA v Commission [1996]
ECR I-321, para. 49; Case T-203/96 Embassy Limousines & Services v European
Parliament [1998] ECR II-4239, para. 56; Case T-139/99 Alsace International Car
Service v European Parliament [2000] ECR II-2849, para. 39.
73 Case C-470/99 Universale-Bau and Others [2002] ECR I-11617, para. 97;
Case C-448/01 EVN and Wienstrom [2003] ECR I-14527, para. 39; Case C-331/04
ATI EAC and Others [2005] ECR I-10109, para. 24; Case C-87/94 Commission v
Belgium [1996] ECR I-2043, para. 88.
74 Directive 2004/18/EC, Art. 53(1)(a) and (2).
75 Case C-31/87 Beentjes [1988] ECR I-4635, para. 19; Case C-324/93 Evans
Medical [1995] ECR I-563, para. 42; Case C-513/99 Concordia Bus Finland [2002]
ECR I-7213, para. 59; Case C-448/01, EVN and Wienstrom [2003] ECR I-14527,
para. 37; Case C-19/00 SIAC Construction [2001] ECR I-7725, paras 3536; Case
C-315/01 GAT [2003] ECR I-6351, para. 64; Case T-183/00 Strabag Benelux v
Council [2003] ECR I-135, para. 74.
76 Case C-31/87 Beentjes [1988] ECR I-4635, para. 26; Case C-19/00 SIAC
Construction [2001] ECR I-7725, para. 37; Case C-513/99 Concordia Bus Finland
[2002] ECR I-7213, paras 61 and 64; Case C-448/01 EVN and Wienstrom [2003]
I-14527, para. 37; Case C-331/04 ATI EAC and Others [2005] ECR I-10109, para.
21. For an interesting case on discriminatory criteria, see C-234/03 Contse SA and
Others [2005] ECR I-9315.
77 Directive 2004/18/EC, Art. 53(1)(b).
78 The Court of Justice ruled in Case C-247/02 Sintesi SpA [2004] ECR I-9215,
paras 4042, that Member States are precluded from creating rules for the purpose
of awarding public works contracts, following open or restricted tendering proce-
dures, that impose a general and abstract requirement that a contract authority
only uses the criterion of the lowest price even if the authority could have been
benefiting from other objective award criteria that were more likely to ensure free
competition. For the obligation that criteria must be applied in conformity with
procedural rules and principles of EU law, see Case C-448/01 EVN and Wienstrom

3.1 Summary
With regard to most procurement procedures, cartel stability does not

appear to be supported because the procedures employ a single step pro-
cedure or do not offer the possibility of repeated interaction within the
procedure. The cartels reaction to a violator will thus occur outside that
particular tender. In the case of framework agreements and electronic auc-
tions, however, possibilities for retaliation in the procurement rules can
support cartel stability because both detection and the penalizing of cartel
renegades is possible.
Regarding arbitrary selection procedures, it is not surprising to observe
that such arbitrariness is avoided as far as possible. From a law and eco-
nomics perspective it is expected that this will have a generally positive
effect on cartel stability.
4. CONCLUSION
The foregoing sections have examined to what extent EU public procure-

ment legislation is in line with auction theory and the ways in which
auction theory could be used to prevent bid rigging conspiracies. Concrete
insights that can be employed by procurement entities to undermine cartel
formation and stability have also been examined.
It has been shown that some aspects of the public procurement rules facil-
itate the creation of bid rigging conspiracies. Areas giving rise to concern
regard the use of subcontracting where more control would be desirable for
tendering authorities, the use of reserve prices and the treatment of consor-
tia. Most of the problems seem to arise in the context of framework con-
tracts and electronic auctions. Here, too, much of the information required
to create a bid rigging cartel is available to participants. Furthermore, in-
auction signalling is not ruled out in electronic auctions. On a positive note,
the stipulations on withdrawals, information costs, increasing the number
of serious bidders and national bias appear to be adequate, although it bears
mentioning that public procurements remain largely a national affair.
The EU procurement legislation does not seem to have a major problem
in the area of cartel stabilization. It is only in the context of framework
agreements and electronic auctions that cartel members may have the
opportunity for retaliation within the tender process.
[2003] ECR I-14527, para. 38; Case C-31/87 Beentjes [1988] ECR I-4635, paras 29
and 31; Case C-513/99 Concordia Bus Finland [2002] ECR I-7213, paras 62 and 63.

In general, however, it must be noted that the legislator has opted

for transparent and non-discretionary procedures and selection criteria.
From a law and economics perspective, such a choice seems to facilitate
cartelization; it is, however, very much in line with administrative law
principles.

China
A comparison of international procurement data shows that Chinas
public procurement is limited in terms of GDP.1 While the real influence
of the public sector may be understated by a mere comparison of figures,
it is noticeable that Chinese government procurement only accounted for
around 1.6 per cent of GDP in 2008.2 Differences are noticeable not only
in terms of the relative size, but also in terms of the absolute size of the
procurement market.
While exact data on the occurrence of bid rigging conspiracies3 is
not available and academic research is virtually absent with regard to
the Chinese situation,4 a number of observations can still be presented.
According to the United States Trade Representative, public procure-
ment prices in the Japanese construction market are inflated by up to
30 per cent as a result of bid rigging conspiracies.5 Without any sound
economic analysis this finding is, of course, not directly applicable to the
Chinese public procurement market for construction projects. Such an
analysis, however, is foreclosed because of the absence of relevant data.
Furthermore, it is clear that the construction market can differ signifi-
cantly from particular markets for goods and services and this finding may
1 For a general caveat on statistical data in China, see Clarke (2003).

2 Chinese public procurement has risen sharply over the past years. In 1998
the scale of the government procurement was 3.1 billion RMB while for 2007 it
was estimated at 400 billion RMB. In 2007, the GDP of China was 24 trillion, and
the fiscal expenditure was approximately 5 trillion. Thus public procurement still
accounts for just 1.6% of the GDP and 8% of fiscal expenditure and remains much
below magnitudes prevailing in OECD countries. See.
20081024http://www.ccgp.gov.cn/site13/llsj/
jycz/747867.shtml, visited on 21 November 2012 (Liu, Qingen (2008), Study of
the cultural development of government procurement (Part One), Net of Chinese
Government Procurement, 24 October 2008).
3 It should be noticed that here the term is narrower than what is generally
understood by the Chinese public. It does not include corruption conspiracies

between bidders and procuring entities but is limited to conspiracies between
enterprises competing for a tender.
4 This author is not aware of any studies addressing this point.
5 USTR (2002), 9.
109

therefore be particularly relevant to the construction sector and to Japan.

Because of these methodological caveats this finding is reduced to a mere
observation. Nevertheless, it is noticeable for it gives an indication that
the money lost in bid rigging conspiracies can be quite substantial. If it is
arbitrarily assumed that bid riggings in China amounted to only 10 per
cent, tax payers would have lost 40 billion Yuan in 2007.6
Even though the budgetary situation in China is much different from
that of most countries, the potential savings can be regarded as constitut-
ing an important incentive for legislators to consider this issue. While
the size and magnitude of bid rigging in China is not known, anecdotal
evidence does suggest that there is general dissatisfaction about procure-
ment prices and the contracted quality, and that bid rigging offences are
frequent. The widespread recognition of local and regional protectionism
in China may lead to repeated interactions of companies, which would
support the view that bid rigging conspiracies might be more widespread
than is perceived by the general public.
Even in the absence of exact data on bid rigging it is noticeable that
China has been addressing such problems by setting up procurement
systems directed towards construction works as early as the 1980s, and
thoroughly reformed them in the course of the 1990s. The implementation
of the government procurement regulations alone is estimated to have
already reduced costs by about 11 per cent.7 Following its accession to the
World Trade Organization, China promulgated yet another Government
Procurement Law that came into force on 1 January 2003. This law speci-
fies that procurement is to be carried out in accordance with the principles
of openness, transparency, fair competition, impartiality and good faith.
It complements the Bidding Law, which was adopted in 1999 and deals
with bidding procedures for construction projects.
The above can be summarized as follows. There is no hard empirical
evidence concerning bid rigging conspiracies in China. Anecdotal evidence
and descriptive insights gained from cross-section comparisons suggest
that social costs arising from such conspiracies can be substantial. Even
small improvements in the actual bid rigging situation can be financially
attractive. Given the lack of data, this part of the book examines the con-
tribution that auction theory can make to prevent bid rigging conspiracies
in China.
6 The size of Chinese public procurement was estimated at 400 billion RMB in
2007: See 200810
24http://www.ccgp.gov.cn/site13/llsj/jycz/747867.shtml, visited on 21 November
2012, above note 2.
7 Li Xiao (2002).

China 111
Chapter 7 examines the effectiveness of the present Chinese regulatory

system from a law and economics perspective. It draws upon the general
law and economics insights regarding optimal deterrence presented earlier
and examines how the current regime addressing bid rigging conspiracies
is to be evaluated from this perspective. Particular emphasis is placed on
the examination of the legal arsenal that authorities employ to contain bid
rigging, which is well designed to effectively counter bid rigging conspira-
cies.8 Laws covered include the Anti-Unfair Competition Act, the new
Chinese Anti-Monopoly Law, the penal code and the public procurement
laws. Since not all readers may be familiar with the Chinese procurement
laws, a description is included in Appendix II. The presentation follows
the logic of a procurement procedure from determining the applicable law
to the criteria employed to award the contract.
The following chapter (Chapter 8) analyses the ways in which auction
theory can be utilized to counter bid rigging conspiracies and whether
the current legal framework addressing bid rigging is sub-optimal. Before
commencing, it is worth repeating that the concept of bid rigging in China
does not only embrace collusion but also corruption. The concept is thus
broader than it is in other jurisdictions. For the purpose of this research,
bid rigging is considered to embrace only cartels and not corruption. The
reason for this explicit choice is that corruption falls beyond the scope
of both auction theory and other areas of economics, such as industrial
economics, that address cartels.
8 As is expressly stated, this research addresses bid rigging conspiracies,
although it should be noted that some policy suggestions may also support corrup-
tive activity. In the presence of trade-offs countering bid rigging and corruption,
decision makers are required to make a well-informed policy decision.

Bid rigging in China
7. The effectiveness of the legal regime

applicable to bid rigging in China
1. INTRODUCTION
This chapter1 analyses whether the Chinese legal arsenal governing bid
rigging conspiracies deals effectively with them so as to allow govern-
ment entities to buy at competitive prices.2 In order to be able to analyse
whether or not the current legislation in China is optimally addressing
bid rigging conspiracies the chapter measures the current legal frame-
work against the law and economics findings and examines whether
the incentives created are sufficient to induce bidders to comply with
the law. This approach is necessary since there is no hard empirical
evidence available to confirm that bid rigging conspiracies in China are
widespread and inflict considerable damage upon society. Anecdotal
evidence reported earlier which suggests a general dissatisfaction with
price levels and the quality procured is therefore complemented by this
theoretic treatment.
The legislation reviewed includes the Anti-Unfair Competition Law,
the new Chinese Anti-Monopoly Law, the Penal Code, and the public
procurement laws. For a long period of time the Anti-Unfair Competition
Law was the only means of addressing competition issues. The Chinese
Anti-Monopoly Law is a new addition to the legal arsenal that can be
brought to bear on bid rigging cartels. Its promulgation took place on 30
August 2007 and it entered into force on 1 August 2008. It is generally
hoped that this new law will make a significant contribution to the crea-
tion of a market-based economy.
This section of the chapter presents the current legislation that is avail-
able to counter bid rigging conspiracies and seeks to analyse it from a
law and economics perspective in order to determine its effectiveness.
In particular, it seeks to ascertain whether the existing provisions allow
1
This chapter extends earlier research published in Weishaar (2010).
2
I am indebted to the participants of the conference Europe: From Nation
States to a State of Nations, Beijing University, Beijing (China) on 2123 May
2007, for their helpful comments.
112

Bid rigging in China 113
government entities to procure at competitive prices. The provisions con-

sidered here stem from the Anti-Unfair Competition Law (Section 2), the
Anti-Monopoly Law and Competition Law (Section 3), the Penal Code
(Section 4), and the public procurement laws (Section 5). A summary will
conclude this chapter (Section 6). To the extent that the legal framework
governing bid rigging conspiracies is not likely to enable procuring entities
to purchase at competitive prices, Chapter 8 will examine how auction
theory could be used to improve the situation.
2. THE ANTI-UNFAIR COMPETITION LAW
This law was adopted in 19933 to safeguard the robust development of the
socialist market economy, encourage and protect fair market competition,
prohibit unfair competition and safeguard the legal rights and interests
of managers.4 In addition to express prohibitions, it embodies a series of
principles such as voluntariness, equality, impartiality, honesty and good
faith, and public commercial morals to determine the existence of undue
behaviour.5 Even though it functions primarily as a consumer protection
law,6 it also addresses issues such as bid rigging, which falls within the
scope of this research.
Article 15 of the Anti-Unfair Competition Law prohibits collusion in
bidding, price increases and reductions. It also outlaws conspiracies with
procurement entities with the objective of putting competitors out of the
competition.7 With regard to the material scope of bid rigging, Article 3 of
the Interim Provisions clarifies that the concept is to be construed broadly.
Any agreement to increase or decrease prices, or to take turns in winning
bids, holding pre-auctions to determine winners, or any other collabora-
tive activities among bidders will fall within its ambit and are outlawed.8
Behavioural incentives created by law are, according to Becker,9 a
function of the expected punishment for trespassing and the likelihood
of detection. With regard to the punishment for trespassing against the
3For regulations and policies predating this law and the adoption of the Anti-
Unfair Competition Law, see Jin and Luo (2002), Ch. 1, in particular section 3.
4 Anti-Unfair Competition Law, Art. 1.
5 Ibid., Art. 2.
6 See Williams (2005), 166.
7 See also the Interim Provisions on Prohibiting Bid-Rigging, Decree No. 82,
State Administration for Industry and Commerce, 6 January 1998, Art. 2.

8 Ibid., Arts 3(1)(4).
9 Becker (1968).

Anti-Unfair Competition Law in respect of bid rigging conspiracies,

a number of important observations cast doubt on the effective incen-
tive compatibility of the existing provisions. The law stipulates that
submissions of bid rigging entities are invalid and administrative fines
depending on their seriousness range from 10,000 to 200,000 RMB.10
The maximum financial penalty is criticized by the enforcement agency
as ineffective and no longer sustainable given Chinas unprecedented
economic development.11 It appears to be too low to deprive trespassers
of all their benefits from cartelization. This is especially so in light of the
fact that the confiscation of illegal proceeds and the charging of triple
damages is not permissible.12 Despite this criticism, it is worth mention-
ing that the legal consequences extend to all parties involved in the bid
rigging conspiracy13 and that this is to be evaluated positively from a law
and economic perspective because it increases the expected punishment
for each cartel member.
Regarding the second issue, detection, it has to be pointed out that,
despite the strong institutional powers held by the Chinese competition
authorities the State Authority for Industry and Commerce (SAIC)
does not need a court to administer fines enforcement records do not
appear to be particularly impressive. Statistical observations appear to
endorse this suggestion. In 2000 the total number of registered offences
under the Anti-Unfair Competition Law amounted to 26,053 cases. This
compares unfavourably with the estimated 33 million enterprises that
exist in China.14 More recent figures appear to suggest higher enforce-
ment activity by SAIC. The number of registered offences under the
Anti-Unfair Competition Law amounted to 41,301 in 2008.15 Although
it may be interesting anecdotal evidence, the number of cases adjudicated
10 This is approximately 1,000 to 20,000. Anti-Unfair Competition Law,

Art. 27 and Interim Provisions on Prohibiting Bid-Rigging, above note 7, Art. 5.
11 See OECD (2001), 4.
12 Anti-Unfair Competition Law, Art. 27.
13 See Interim Provisions on Prohibiting Bid-Rigging, above note 7, Art. 6.
14 See OECD (2001), 3 and 5. This implies that the law was applied
against only 1 in 1,267 enterprises in 2000. In comparison with this figure, the
Wettbewerbszentrale, a private organization dedicated to enforcement of the
German act against unfair competition (Gesetz gegen unlauteren Wettbewerb,
UWG), alone recorded around 20,000 cases. Taking this number as a basis for
comparison, this would imply that the UWG has been employed against 1 in every
370 enterprises in 2001 and that this figure is likely to be understated. Data taken
from Statistisches Bundesamt (2003), Table 2.1 and Wettbewerbszentrale, (2001),
2.
15 SAIC (2008).

by the court system is not accounted for.16 Nevertheless, OECD reports

have complained about the low level of legal accomplishment and the
sometimes restricted cooperation, the limited ability of courts to assist
administrative authorities17 and the entrenched local protectionism.18
This, in turn, would underline the likelihood of insufficient enforcement.
It is therefore concluded that neither the administrative fine nor the likeli-
hood of detection appears to be sufficiently strong to create the appropri-
ate incentives for undertakings to obey the law.19
3. ANTI-MONOPOLY LAW IN CHINA
The second law to be considered is the new Anti-Monopoly Law. Over the
past decade several versions of a competition law have been drafted and
debated. Drafts contained prohibitions on cartels, trusts, monopolistic
practices and restricting competition to complement the Anti-Unfair
Competition Law.20 The present competition law was promulgated on 30
August 2007 and entered into force on 1 August 2008. As with its former
draft, the current Anti-Monopoly Law could be described as based on the
EU competition law model,21 although the parallels with EU competi-
tion law under the enacted law are fewer, while economic theory is more
pronounced.
The four main areas addressed by the Chinese law are monopoly
agreements, abuse, concentrations of market power and administrative
monopolies. The scope of this chapter is, however, too limited to give a
comprehensive law and economics treatment of Chinese competition law
as a whole that includes a strong comparative law assessment.22 What
is presented in the next section is a law and economics treatment of the
relevant sections of the law that apply to bid rigging conspiracies with a
view to assessing the legal effectiveness of the provisions. To determine the
legal effect against bid rigging we have to consider the scope, as well as two
important elements for the generation of efficient incentive structures for
16 Anti-Unfair Competition Law, Art. 22, grants damaged parties access to

the court system.
17 See OECD (2001), 5.
18 See OECD (2004), 34 and Williams (2005), 169 ff.
19 On this point see the seminal work of Becker (1968).
20 See Au (2004), 255. For an elaborated review see Williams (2005), Ch. 5, but
also Hittiger (2007).

21 See also Williams (2005), 205.
22 A very good effort in this regard is presented by Van den Bergh (2007).

undertakings to obey law: the costs associated with an infringement and

the probability of detection.23
In order to determine the scope of application of the Chinese Anti-
Monopoly Law against bid rigging conspiracies, we need to examine
Article 13. This article prohibits monopoly agreements, which are defined
as agreements, decisions or other concerted behaviour that eliminate
or restrict competition. The wording thus appears to be more restricted
under the enacted Anti-Monopoly Law than it was under its 2005 Draft.
The deletion of the reference to the purpose or effect of an agreement24
does not only limit the scope of the provision but, at the same time, also
increases the burden of proof for the competent authorities when com-
pared to its former draft.
Another factor that limits the scope of the Anti-Monopoly Law is the
removal of the direct reference to bid rigging. Unlike its predecessor,
thecurrent law no longer contains an express reference to bid rigging.25
The deletion of this reference by itself is striking; the reasons, however, are
not known. One possible explanation for this could be found in economic
theory. From an economic perspective, bid rigging conspiracies could be
subsumed under Article 13(3) of the Chinese Anti-Monopoly Law which
prohibits the division of the sales market or the raw material purchasing
market.26 Independently of this theoretical possibility it is noticeable that
SAIC has recently taken the lead in expressly bringing bid rigging within
the ambit of the Anti-Monopoly Law.
SAIC has adopted a regulation, on the basis of Article 13(6), which
forbids actions to achieve monopoly agreements for consultation entitled
Rules on the Forbidding of Actions to Achieve Monopoly Agreements.27
The rules entered into force on 1 February 2011. This article allows the
anti-monopoly enforcement authority under the State Council to create
additional regulations to add other forms of monopoly agreement. Article
5 of the regulation extends the scope of monopoly agreements by
directly addressing bid rigging:
23 See Becker (1968).

24 Terminology also contained in European competition law.
25 See Draft Competition Law 2005, Art. 8(2), and Chinese Anti-Monopoly
Law, Art. 13.

26 Other authors propose that bid rigging could be subsumed under Article
14(1), which prohibits the fixing of prices for resale to a third party: see Hittiger
(2007), 260.
27 Seeat http://www.saic.gov.cn/
zwgk/zyfb/qt/fld/200904/t20090427_37769.html.

Article 5
Prohibiting the competing business operators from reaching any of following
monopoly agreements with each other: . . .
(5) bid rigging. Including behaviors, such as getting the promises between
bidders and through inside decision to choose the winner, rotating winner, and
conspiracy in any other business other than the quoted price.28
The enactment of this regulation undoubtedly brings bid rigging con-

spiracies within the ambit of the law. Given the wording of the article on
which the regulation is based, this regulation would be equally applicable
by all anti-monopoly enforcement agencies.
The positive finding that bid rigging may be addressed by the Anti-
Monopoly Law must be qualified. The actual Chinese Competition
Law contains derogations under which bid rigging conspiracies could
be permitted. Provided that bid rigging conspiracies do not substantially
restrict competition and enable consumers to share the benefits, collusive
agreements falling within the ambit of Articles 13 and 14 of the Chinese
Competition Law may be declared permissible under Article 15. As was
the case under Articles 9 and 1129 of the draft law, Article 15 provides
derogations for agreements that improve the overall state of the economy,
the products and production, or enhance the capabilities of small and
medium-sized enterprises. Such derogations are by no means unknown to
other competition law regimes and, for example, are contained in the EU
regulation.30 It is also noticeable that, notwithstanding that the wording of
the former and the current text is largely comparable, it appears that the
derogations are construed more widely under the current Anti-Monopoly
Law. In particular, the necessity of cartelization to achieve the object-
ives of a measure is no longer a precondition for the application of the
derogations;31 this is an important and questionable difference between
the draft law and the 2008 Anti-Monopoly Law that has to be criticized
from a law and economics perspective.
On a more general but equally important note, it is hard to conceive
how consumers or society at large could benefit from bid rigging conspira-
cies, as required by Article 15 of the Chinese Competition Law. It may
28 Seeat http://www.saic.gov.cn/
zwgk/zyfb/qt/fld/200904/t20090427_37769.html.
29 The scope of public policy considerations is broadened even more by
Article 11 of the Draft Competition Law, which gives the competition author-
ity the right to exempt agreements that safeguard the states interest and social
welfare.
30 See Article 101(3) TFEU.
31 See Draft Competition Law, Art. 9.

therefore be expected that bid rigging is unlikely to benefit from any of

the above derogations.32 Only practice will show how the relevant Chinese
competition authorities will apply the derogations, and a conclusive
law and economics assessment of their applicability towards bid rigging
cannot therefore be made at present.
Besides the scope, the punishment for or cost of trespassing is an impor-
tant element to be examined from a law and economics perspective to
assess the incentives of undertakings to abide by the law. Some issues can
be pointed out.
Most noticeably, administrative fines differ considerably between the
Chinese legislation and competition regulations of other jurisdictions and
are generally regarded as being too low to secure efficient deterrence.33
The Chinese Anti-Monopoly Law punishes bid rigging conspiracies with
confiscation of illegal proceeds and a fine ranging from 1 to 10 per cent
of the sales turnover in the relevant market from the previous year.34
Offences that have not been implemented are still punishable by law by up
to 500,000 RMB.35
While the confiscation of illegal proceeds and the fine may be sufficient
to punish bid rigging conspiracies where the detection rate is fairly high,
it may fail to function well as a deterrent if the detection rate is low. By
contrast, it may be pointed out that fines for bid rigging violations in the
EU, for example, appear to be higher. Article 23(2) of Council Regulation
(EC) 1/2003 envisages fines not exceeding 10 per cent of the turnover of
the entire undertaking not of the relevant market during the previous
year. Despite differences in the economic potency of the undertakings in
both jurisdictions, it may thus be feared that the deterrent effect of the
Chinese measures may be limited for large conglomerates. Despite this
concern, it is worth mentioning that the present Chinese Anti-Monopoly
Law is an important improvement when compared to its previous draft
that envisaged a fine ranging from 100,000 to 1,000,000 RMB, or a fine
not exceeding 10 per cent of the turnover in the relevant market and no
confiscation of illegal proceeds.36
Another way in which antitrust violations can be deterred is through
claims by private parties. Article 50 of the Chinese Anti-Monopoly Law
imposes civil liability upon those undertakings that violate the law and
32 It bears mentioning that under European law bid rigging is considered a
hardcore violation: see Jones and Sufrin (2007).

33 Van den Bergh and Faure (2011), 66 ff.
34 See Chinese Competition Law, Art. 46.
35 See Chinese Competition Law, Art. 46. Around 50,000.
36 See Chinese Draft Competition Law, Art. 46.

cause damage to others. What this civil liability entails is still unclear,37
although since it does not entail the payment of triple damages or the
class action,38 the threat of private claims may be a weak tool to deter bid
rigging violations.
The Chinese Anti-Monopoly Law thus has the problem that, because
of the low probability of detection and high expected gains from bid
rigging conspiracies, no adequate sanction can be imposed. This may
be the situation when fines are so large that undertakings are unable to
pay (the judgment proof problem see Chapter 5, Section 3.2 above)
and also in situations where the trespasser is fully able to pay. In both
situations Beckers model would suggest an increase in punishments or in
the detection rate. Since the latter is addressed below, punishments will
continue to be considered in this section. Criminal sanctions, disappoint-
ingly, are not foreseen by the Chinese legislator as enforceable against
undertakings. The only criminal liability envisaged by Article 54 in fact
accrues to the civil servants enforcing the law when they neglect their
duties and not to undertakings that violate the Anti-Monopoly Law.39
The laudable introduction of the confiscation of illegal gains from bid
rigging conspiracies is, however, a useful addition to the former fines.
Nevertheless, under-deterrence albeit mitigated by the confiscation of
illegal proceeds40 cannot be overcome when gains from bid rigging are
high.
In the context of bid rigging conspiracies, where competing bidders that
could not have won the tender in the first place41 are harmed, it may even
be difficult to establish that direct harm has been caused. Their harm may
be of a more indirect nature: first, by having incurred expenses in partici-
pating in a rigged bidding without having been reimbursed through the
award of the tender or by the cartel, and, second, by seeing an improve-
ment in the financial position of a series of competitors. As indirect as
the harm may be, the expected benefits from an enforcement procedure
may be even more indirect. The benefits for a competitor are (i) annul-
ment of the tender procedure; (ii) putting competitors on a black list to
exclude them from future procurements; and (iii) having competitors pay
fines. Since the first two benefits are only offered by the Chinese public
37 Zhang and Yanhui Zhang (2007), but also Hittiger (2007), 272.
38 See Zhang and Yanhui Zhang (2007).
40 Bowles, Faure and Garoupa (2000).
41 It is an advisable strategy to establish bid rigging cartels that exclude those
competitors that have high cost structures from the cartel. Such bidders that do
not stand a chance of winning a contract will thus not share the cartel proceeds.

procurement legislation, it is likely to be less cumbersome for the bidder

to submit his claim to the qualified authorities than to go to trial himself.
Besides the scope of the law and punishment, detection is another
important element to be examined from a law and economics perspective
to assess the incentives of undertakings to abide by the law. While in many
respects it appears to be too early to examine the actual enforcement prac-
tices, it bears mentioning that the execution of the Anti-Monopoly Law
is apparently taken very seriously in China and the Supreme Court has
issued a notice in which all judges have been asked to study the law.42 Even
though the notice did not contain specific information on its enforcement
or implementation, it may still serve as a useful tool to bring the recent
law to the attention of the judiciary. As in other jurisdictions, detection of
violations under the Chinese Anti-Monopoly Law depend upon private
enforcement43 and the work of the competition authority.44 Each will be
considered.
Since little information is currently available on private antitrust
detection, very little can be said on private enforcement. While the Anti-
Monopoly Law itself is silent on private enforcement Article 50 provides
that undertakings that violate the law and cause damage to others will
incur civil liability. How this liability is to be effectuated is unclear.
Zhang and Yanhui Zhang are sceptical about the role of private enforce-
ment in the current Chinese legal context.45 They point not only at the
difficulties for private parties to ask for public enforcement of cases but
also at the difficulties of private litigation where victims of antitrust
violations bring charges against undertakings. In particular, the lack of
a class action and treble damages in China implies that private parties
do not have strong incentives to bring an action.46 It thus follows that
in China private enforcement against bid rigging conspiracies may be
limited.
In light of the foregoing it appears that enforcement will have to be
42 See
, ,, (Administrative Law Review),
2001 03 (The Supreme Courts Notice on carefully studying and implement-
ing the Anti-Monopoly Law of the Peoples Republic of China: Gan, Peizhong
and Tao Wu (2001), Debates about the application scope of the Government
Procurement Law, No. 3).
43 See Chinese Competition Law, Art. 38 and Chinese Draft Competition
Law, Art. 10.

44 See Chinese Competition Law, Chapter VI and Chinese Draft Competition
Law, Arts 36, 37 and 38.

45 See Zhang and Yanhui Zhang (2007), but also Hittiger (2007), 272.
46 See Zhang and Yanhui Zhang (2007), 198.

safeguarded predominantly by qualified authorities. When the Anti-

Monopoly Law entered into force in August 2008 many issues relating to
detection and enforcement still had to be finalized by the executive. One
of these issues regards the setting up of the enforcement structures, and it
is thus not surprising that one of the first implementing regulations to be
adopted addressed the institutional enforcement structure. This regulation
seeks to clarify which government agencies will be anti-monopoly enforce-
ment authorities (AMEAs).47
The public enforcement of the Anti-Monopoly Law is structured as a
two-layer enforcement system.48 The top layer is composed of the Anti-
Monopoly Committee of the State Council. In accordance with Article9,
it is charged with the organization, coordination and guiding of the anti-
monopoly work. Its task is to study and draft competition policies, to
enact and issue guidelines and coordinate the enforcement efforts.
Below this are three anti-monopoly execution authorities mentioned
in the Anti-Monopoly Law that are involved in, for example, the review
of concentrations and monopoly conduct. These ministerial level depart-
ments within the central government authorities are charged with investi-
gation and sanctioning.
The three enforcement agencies are the Ministry of Commerce
(MOFCOM), the State Administration of Industry and Commerce (SAIC)
and the National Development and Reform Commission (NDRC).
MOFCOM is responsible for merger control49 while non-price related
anticompetitive conduct such as agreements, abuse and administrative
monopolies fall within the ambit of SAIC.50 Anticompetitive pricing
behaviour and investigations would reportedly fall within the competence
of the NDRC.
It may be feared that this functional division of competences may
negatively impact upon the effectiveness of competition law enforcement
if cooperation between the various organizations is not optimal.51 In par-
ticular, in practice it may prove difficult to distinguish between monopoly
agreements (SAIC) and price-related monopolistic activities (NDRC).
47 This passage is based on Emch (2008), 2 ff.

49 State Council Regulation on the Notification Thresholds for Concentrations
between Undertakings, State Council Order 529 (2008) of 3 August 2008, Arts 3
and 4.
50 Notice of the State Councils General Office regarding the publication of
the preparatory rules on SAICs main mandates, internal bodies, and officials,
Guofaban No. 88 (2008).
51 On the potential of turf battles, see Mehra and Yanbei Meng (2009), 402.

There are several specific tools that the Anti-Monopoly Law offers to
qualified authorities to enforce the law. These are leniency policies and
a duty to cooperate that binds parties under investigation. Each will be
addressed in turn.
Leniency policies offer cartel members an incentive compatible means
to exit a cartel by providing investigators with new information. Such
leniency policies52 were included only in the final version of the Anti-
Monopoly Law. The exact application of these policies is not yet known,
so a detailed analysis is not possible here.
The investigative powers of authorities are crucial for gathering infor-
mation and securing evidence. In the enacted Anti-Monopoly Law these
powers53 have been refined and appear to be far reaching. They resemble
those contained in the EU legislation.54 Furthermore, the penalties that
individuals (200,000 RMB) and companies (1 million RMB) could face
if they seriously obstruct the investigation appear to be sizable enough to
coerce compliance in most cases.
All in all, it appears that the public enforcement potential at least as
far as the current legislation is concerned is to be evaluated positively
from a law and economics perspective. However, time will have to show
how the legislation is interpreted in practice and how it is being applied.
Currently, the prospects of private enforcement, in contrast, must be
viewed critically. Despite the advancements from the draft anti-monopoly
law to the current enactment, the level of punishment still appears to be
too limited to ensure optimal deterrence if gains from bid rigging are high.
An additional element that further underscores the significant
improvements in the Anti-Monopoly Law should be mentioned. The
law has been improved in the sense that bid rigging conspiracies
provided that they are caught at all can no longer be exempted under
a de minimis provision. Article 8(3) of the 2005 Draft Anti-Monopoly
Law, which contained a de minimis provision for the application of the
law against bid rigging, has been omitted.55 While, from an economic
point of view, the social loss caused by cartels, which embraces only 10
per cent of the relevant market, may be described as limited, it remains
unclear why such conspiracies against the public should be allowed.
Besides efficiency considerations (that scarce enforcement resources
52 See Chinese Competition Law, Art. 46.

53 See Chinese Competition Law, Arts 39, 40, 42 and 52.
54 See Council Regulation (EC) 1/2003, Chapter V.
55 Art. 8(3) of the 2005 Draft Competition Law reads: The second paragraph
shall not apply to any agreement by which the product is covered having a share
of less than 10% in the relevant market during the valid period of the agreement.

should be focusing on those cartels that cause the most severe detriment
to society), there appears to be little ground for arguing in favour of such
a stipulation. The risk of wrongly classifying a cartel as de minimis that
has in fact caused considerable social loss by misconstruing the relevant
market appears to be a clear and present danger. Similarly, there is no
longer a need to answer the complex question of whether the relevant
market of a bid rigging conspiracy embraces all eligible bidders that
operate in a relevant market or only those that have actually participated
in the tender.
In light of the above discussion, the Anti-Monopoly Law can be
used to address bid rigging conspiracies. The more widely construed
derogations from the Anti-Monopoly Law that may also extend to bid
rigging cartels are a source of potential criticism but it is still too early
to comment upon the actual application of the law by the competition
authorities. The above analysis has also shown that the sanctions avail-
able under the Anti-Monopoly Law are limited and that the confiscation
of illegal cartel proceeds may not be sufficient to prevent bid rigging
conspiracies. Given the low fines and the absence of criminal penalties
for enterprises, this is expected to give rise to under-deterrence in those
cases where the detection probability is low and where the expected
gains from bid rigging conspiracies are high. Furthermore, the threat
of private law suits which are, for example, an important cost driver
in US antitrust is not expected to substantially increase the deterrence
of collusion. One reason for this is that proof that fellow competitors
were harmed by a bid rigging conspiracy is difficult to establish and
the expected benefits appear to be too limited to induce competitors to
take legal action. It is still unclear how the civil liability provided for in
the law will be put into effect. Given the absence of class actions, treble
damages and the difficulties for private parties to ask authorities to
take up their case, it appears that the strongest ally of competition law
enforcement will be through the antimonopoly enforcement authorities
and not by means of private enforcement. Even though public enforce-
ment of the Anti-Monopoly Law appears to attract much attention
from the authorities, the functional division of competences between the
various enforcement agencies carries the danger of negatively impact-
ing upon effective enforcement. However, the introduction of leniency
policies and the strong investigative powers placed at the disposal of
these agencies suggest that, in contrast to private enforcement, public
enforcement could be promising. It therefore has to be concluded that
the Anti-Monopoly Law, as it stands today, will be unable to effectively
deter bid rigging conspiracies unless the full potential of both public and
private enforcement is utilized.

4. PENAL CODE
The Chinese legal system also provides for criminal sanctions against col-
lusive tendering such as bid rigging conspiracies. Article 223 of the Penal
Code of the Peoples Republic of China reads:56
Where bidders submit tenders in collusion and harm the interests of persons
inviting tenders or other bidders, and when the circumstances are serious, they
shall be sentenced to not more than three years of fixed-term imprisonment,
criminal detention, and may in addition or exclusively be sentenced to a fine.
Where bidders and persons inviting tenders harm the legitimate interests of
the state, collectives, and the public by colluding in the bidding, they are to be
punished in accordance with the stipulations stated in the preceding paragraph.
Punishment under the criminal law is also endorsed by the Interim

Provisions on Prohibiting Bid-Rigging issued by SAIC in 1998,57 which
prescribe the transfer of the case to the relevant judicial organ for investi-
gation of criminal responsibility if a crime is constituted. Unfortunately, it
is not known how vigorously this provision is employed by the courts and
how frequently a qualified authority transfers cases to the court system.
The available information seems to suggest that this provision is rarely
applied.58
Regarding the magnitude of punishments it may be observed that in
Germany, for example, the level of criminal sanctions is higher. Under
Article 264 of the German Penal Code (StGb) the fraudulent element in a
bid rigging conspiracy is punishable with up to five years imprisonment or
a fine. In severe cases bid rigging is punishable by up to ten years. Since, in
practice, proof of damage under Article 263 StGb can be difficult, Article
298 StGb penalizes, with up to five years imprisonment or a fine, anyone
who, upon an invitation to tender in relation to goods or commercial
services, makes an offer based on an unlawful agreement which has as its
aim to cause the procuring entity to accept a particular offer. While, of
course, the actual application of the Penal Code cannot be inferred from
the maximum fines available, they may nevertheless be regarded as an
56 Criminal Law of the Peoples Republic of China, adopted by the Second
Session of the Fifth National Peoples Congress on 1 July 1979 and amended by
the Fifth Session of the Eighth National Peoples Congress on 14 March 1997.
57 See Interim Provisions on Prohibiting Bid-Rigging, above note 7, Art. 5.
58 See, for example, Case HuangZuDe et al. v Industry and Commerce
Administrative Bureau in MengShan district, GuangXi Province (in Chinese:

60, http://vip.
chinalawinfo.com/NewLaw2002/Slc/slc.asp?db5fnl&gid5117529214).

indication of the importance the legislator attributes to bid rigging. While

the level of punishment appears to be sufficient to serve as an effective
deterrent in the presence of strong enforcement, it may seem too low if
enforcement is not sufficient, or if the benefits of bid rigging conspiracies
are high. At this stage a law and economics analysis remains inconclusive.
5. PUBLIC PROCUREMENT LAWS

The Chinese public procurement laws expressly prohibit collusion,59
although collusion is not defined so the exact scope of the concept cannot
be determined. Yet it is noticeable that the Bidding Law narrows the scope
of collusion to price fixing, which severely restricts the nature of collusive
practices that are caught within the construction sector. A strict interpre-
tation of the wording of the text would imply that collusive practices such
as market sharing or the ex ante determination of a designated winner
would not be outlawed under the present law even though they work to
the detriment of society.
Besides expected profits, other important aspects in deciding whether it
is profitable for undertakings to engage in bid rigging are the associated
costs of infringing laws and the likelihood of detection. In keeping with the
structure above, the potential punishments are reviewed first.
Considerable differences may be observed in the fines associated with a
violation of the laws. The Bidding Law60 establishes high charges for indi-
viduals (10 per cent of the fine levied on the undertaking) while it provides
only for relatively low fines for undertakings (0.5 to 1 per cent of the con-
tract value). In addition, it prescribes the invalidation of the bid and the
confiscation of any illegal gains. For serious offences the law provides for
temporal disqualification from public tenders (one or two years), the revo-
cation of business licences, payment of compensation and criminal sanc-
tions. Given the rather low value of a fine, the effective deterrence of undue
company conduct in the construction sector is not ensured. The ability to
place undertakings on a black list and exclude them for up to two years
from procurement tenders appears to be a more promising sanctioning
tool in this context, yet this too may be deemed to be insufficient to ensure
full incentive compatibility. The relatively low levels of fines imposed upon
undertakings can be explained by the laws focus on self-interested indi-
viduals (corruption) rather than bid rigging (profit-seeking undertakings).
59 See Bidding Law, Art. 32 and Government Procurement Law, Art. 25.
60 See Bidding Law, Art. 53.

The Government Procurement Law more effectively addresses bid

rigging conspiracies by levying a higher fine of 5 to 10 per cent of the
contract value, the confiscation of any illegal proceeds, and punishing
infringements of the law by forbidding admittance to public tenders for
a period of one to three years. In serious cases the business licence may
be revoked and criminal charges put forward.61 In addition, it establishes
civil liabilities.62 It is therefore apparent that not only the focus of the
Bidding Law and the Government Procurement Law is different but also
the cost of infringement under the latter is much higher. Comparing the
fines under either law with those under the China Competition Law, they
appear to be lower,63 and in comparison with the EU, for example where
up to 10 per cent of the turnover during a business year of the entire under-
taking can be levied they also appear to be rather low.
With regard to the second element, detection, it is noticeable that in
addition to the supervisory organs under the State Council, both laws
allow for private parties to launch complaints and report any violation of
the law.64 This is an important addition to the detection potential of the
procuring entity.
In general, it appears that the Chinese procurement regime as such
is unable to offer a sufficient degree of deterrence against bid rigging
conspiracies. The procurement laws lack a clear definition of the term col-
lusion, and the scope of collusion under the Bidding Law is too narrow to
contain all variants of bid rigging conspiracies. Given also that the level of
punishments appears to be low, a high detection rate is required in order
to provide for a sufficient degree of deterrence if gains of cartelization are
high. Allowing for private detection in this context is laudable yet, given
the anecdotal evidence of corruption and bid rigging cases, it may be
feared that, in practice, the detection rate is insufficient to secure compli-
ance with the procurement laws.
6. CONCLUSION
This chapter has considered to what extent the various laws that address
bid rigging conspiracies in China are doing so in an effective way.
61 See Government Procurement Law, Art. 77.

62 Ibid., Art. 79.
63 Whether this is indeed the case depends upon the size of the procurement
contract.
64 See Bidding Law, Art. 65 and Government Procurement Law, Arts 52, 55
and 70.

Adopting the basic insights of Gary Becker that laws will be obeyed if the
incentives for actors are such that it is more beneficial to comply than to
disobey, the Anti-Unfair Competition Law, the Anti-Monopoly Law, the
Penal Code and the public procurement laws have all been examined. It
has been found that both the economic and administrative law provisions
as such do not offer a sufficient deterrence effect to contain bid rigging
conspiracies in situations that are best characterized by high profits and
little risk of detection. The current fines appear to be quite limited by
international comparison and enforcement of the economic laws seems to
be limited. In particular, private enforcement of the Anti-Monopoly Law
is found to be wanting. Reliable information on public enforcement is not
available but anecdotal evidence suggests that bid rigging conspiracies are
widespread and that there is general dissatisfaction regarding the procured
quality. This, in turn, also suggests that the Chinese Penal Code is insuf-
ficient to coerce economic actors into compliance.
It is therefore concluded that there is criticism from a law and econom-
ics prospective which suggests that the current legal regime applicable to
bid rigging conspiracies in China is sub-optimal. Future research is needed
on how the various legal fields interrelate to further substantiate this
point. This research may be particularly interesting with regard to the new
Anti-Monopoly Law, which is subject to much administrative attention.

8. Application of auction theory in
China
1. INTRODUCTION
The previous section has shown that law and economics theory suggests
that Chinese legislation is not well designed to prevent bid rigging
conspiracies. This chapter analyses how far the public procurement
legislation in China follows auction theoretic insights in order to
determine if there are ways in which auction theory could help to prevent
cartel formation and cartel stability. Both issues are discussed in turn.
2. CHINESE PUBLIC PROCUREMENT LAWS AND

CARTEL FORMATION
In line with the auction theoretic treatment above, the issues reviewed in
this section will be limited to winner determination and the distribution of
auction proceeds, new entrants and the auctioneers response.
2.1 Winner Determination and the Distribution of Auction Proceeds
Auction theory suggests obstructing the exchange of information during

the bidding process so as to prevent signalling. With regard to the Chinese
public procurement regime, it is noticeable that this does not appear to be
a problem. The default tendering mechanism is a closed, sealed bidding
process and the other purchasing formats are individualized. It would,
however, be an important consideration if the State Council were to
enlarge the group of allowed bidding procedures under Article 26 of the
Government Procurement Law (GPL).
Auction theory further suggests that procuring entities should refuse
to select winners from among identical bids by lottery schemes and that
they should employ secret or arbitrary criteria in order to adversely affect
cartel enforcement and hence cartel stability.1 It also suggests that such
128

Application of auction theory in China 129
behaviour would complicate cartel formation by compelling members to

establish a sophisticated allocation scheme of collusive proceeds. While
this would certainly undermine cartel stability in practice, it should be
observed that such measures do not appear to be permissible under the
present Chinese public procurement regime since they go against the prin-
ciples of openness and transparency.2 Furthermore, rules that would allow
procuring entities the exercise of discretion could be thought to undermine
the current anti-corruption bias of the Chinese public procurement regime;
this area is thus unlikely to be revised in the foreseeable future.
The Chinese legislator does, however, address other means of dis-
tributing cartel proceeds. The current legal regime in China adequately
addresses the division of cartel proceeds through the stipulations govern-
ing subcontracting. Under both laws the successful bidder may only use
subcontractors subject to the prior consent of the procuring entity.3 The
distribution of cartel proceeds by having cartel members perform part
of the original contract is therefore subject to the immediate influence
of the procuring entity. If properly monitored, subcontracting cannot be
employed by cartels to distribute cartel proceeds.
2.2 New Entries
Auction theory suggests that successful cartels need to control new entries
to ensure profitability through pre-auction entry deterrence and optimal
cartel member selection. Strategies for procuring entities to increase the
number of bidders are considered below; issues such as calling off procure-
ment tenders where the number of bidders is too low and entry deterrence
are addressed next.
With regard to discontinuing the procurement process, the Chinese pro-
curement laws appear to be well designed. Invitation-based procurements
require that a minimum of three randomly selected eligible suppliers4
must be invited.5 The procurement procedure may be cancelled if there
are fewer than three eligible6 or acceptable7 submissions, if infringements
of the law have occurred,8 or if important changes have taken place.9
2 Bidding Law (BL), Art. 5, and Government Procurement Law (GPL), Art. 3.
3 BL, Art. 48, and GPL, Art. 48.
4 See GPL, Art. 34.
5 Ibid., Art. 35.
6 Ibid., Art. 36(a).
7 Ibid., Art. 36(c).
8 Ibid., Art. 36(b).
9 Ibid., Art. 36(d).

New procedures can be initiated after notifying all bidders.10 Similarly,

for holding competitive negotiations and price inquiries at least three
eligible suppliers are required.11
The earlier mentioned (pre-)auction entry deterrence and inhibition
strategies such as signalling, reputation building or price limiting do not
give rise to anticompetitive concerns provided they reflect normal business
conduct and are in general much closer to the field of interest of competi-
tion enforcement agencies than to that of procuring entities. Yet, with
regard to the Chinese legislation, a curious peculiarity closely related to
pre-entry signalling can be observed. Strategic firm behaviour is not only
influenced through such end-state oriented activities as predatory pricing
but also through ex ante declarations of future conduct. If an undertaking
threatens to engage in fierce competition in an industrial market should a
new competitor participate in a tender, such behaviour might be caught
by the Chinese public procurement regime, which expressly condemns
the exclusion of bidders from fair competition.12 This may be viewed to
include announcements that have the object or effect of deterring tender
submissions.
2.3 The Auctioneers Response
As shown above, there are a number of strategies that procuring entities

can use to undermine bid rigging conspiracies. The identified issues of
information disclosure, reserve prices, the number of bidders and auction
mechanism design will be examined here.
In order to complicate the identification of bidders and in order to
undermine the establishment of a bidding strategy for cartel members,
Article 22 of the Bidding Law (BL) prohibits the disclosure of any infor-
mation regarding potential bidders. While this prohibition applies to the
construction sector, it is not part of the section of the BL that is likely to
apply to open bidding procedures under the GPL. Whether the absence of
such provisions under the GPL has any impact on the actual information
publicized in tender notices is not known. Yet, since economic theory pre-
dicts that the mere disclosure of the number of expected bid submissions
may alter bidding behaviour and may cause potential competitors to shy
away, the absence of express stipulations carries potential dangers that are
critically evaluated from an economic perspective.
10 See GPL, Arts 36 and 37.

11 Ibid., Arts 38 and 40.

A further element that impacts upon bidding strategy by creating uncer-

tainty about the reserve price of acceptable tenders is to be commended.
Both legal texts prohibit the disclosure of bid ceilings.13 Keeping the exist-
ence of bid ceilings secret allows procuring entities to employ them as a
tool to undermine bid rigging conspiracies.
There is concern over the ways in which the public procurement regime
influences the number of bidders. Economic theory predicts that collusion
is increasingly difficult if the number of potential competitors increases.
Not only is it more difficult to reach agreement, but also the expected
profits have to be shared between more undertakings, which in turn nega-
tively impacts upon the attractiveness of colluding. A procuring entity
should therefore seek to attract as many credible bidders as possible. The
Chinese laws, however, artificially reduce the number of bidders. Ways to
reduce the number of competitors relate to tender publication, the costs of
submitting tenders, national bias and the treatment of consortia. Each will
be considered in turn.
The scope of domestic competitors is reduced through the absence of
an official nationwide public procurement journal in which all tenders are
listed. Designated departments are obliged to publish tenders in good time
through the general mass media,14 yet it is questionable whether the lower
information costs associated with an official journal would not attract a
larger number of competitors. This could allow for more potential com-
petition, particularly in industries that are subject to over-capacity or that
display low transport costs. This, however, presupposes that the local and
regional protectionism in China does not exclude all benefits.
As well as information costs, another element that may prevent bidders
from participating in tenders is associated with the costs of submitting a
tender. Procuring entities are entitled to require attestation documents
to verify bidders qualifications.15 A standardization, or at least a list of
acceptable documents, may reduce the bidding costs to undertakings and
thereby increase the number of actual and potential bidders.
The third element that limits the number of potential competitors relates
to the strong national bias of the procurement law. The GPL prevents16
foreign undertakings from participating in tenders other than in particular
cases where domestic products cannot be procured.17 Domestic products
13 See BL, Art. 22, and GPL, Art. 72.

14 BL, Art. 16; see also GPL, Art. 11.
15 GPL, Art. 23.
16 GPL, Art. 10.
17 For the precise wording of the derogations see GPL, Art. 10.

are those that have at least 50 per cent of their value added in China.18
Foreign imported goods may still be procured under the GPL in excep-
tional circumstances where the domestic product is over 20 per cent more
expensive;19 this can constitute a significant bar to effective competition.
Furthermore, obstacles to market access for foreign invested enterprises
appear, inter alia, to be related to barriers to full and effective par-
ticipation in the standardization process of the Chinese Standardization
Development Organizations,20 unclear definitions of domestic products
and companies, and limited admission of foreign companies to large parts
of the procurement market.21 Such provisions are expected to severely
limit the number of potential competitors and thereby facilitate the identi-
fication of competitors and cartelization.
The last element that is identified to have a negative impact upon the
number of competitors relates to the capital requirements of consortia.
Under Article 31 BL and Article 22 GPL each member of a consortium
must be able to financially assume joint and several liability for the entire
contract, not simply for the part of the contract it wishes to execute. Since,
in effect, the consortium member with the weakest financial position con-
stitutes the decisive element for determining the eligibility for participating
in a tender, a bias towards large, and presumably financially more potent,
undertakings is expected. In addition, smaller undertakings are effectively
barred from forming a joint venture that would, as such, be able to assume
joint liability.
Another point of criticism that can be raised from an auction point of
view is that there appears to be little variety in the bidding procedures.
Auction theory suggests that there is no one-size-fits-all mechanism design
that yields the best results for procuring entities. If, for example, a multi-
unit tender is deemed to yield the best results, such a system should be
used provided, of course, that such important issues as closure rules have
been taken care of.
The above law and economic treatment suggests that there are areas
where the Chinese public procurement regime appears to be following
general auction theoretic insights while there are areas where bid rigging
conspiracies are predicted to be facilitated from an economic point of
view. In the area of winner determination and the distribution of auction
proceeds it has been shown that the legislation obstructs the distribution
18 EUCCC (2011), 9.
19 Ibid., 9
20 EUCCC (2012), 19
21 Ibid., 9 ff.

of cartel proceeds by allowing for the control of subcontracting. However,

it does not follow the auction theoretic criticism regarding the selection
of winners according to subjective criteria. While the reasoning may be
considered in special procurement situations, it is not expressly addressed
in the legislation this is lamentable from an economic point of view but,
as mentioned earlier, is not surprising from a legal point of view.
The legislator appears to be following the auction theoretic insights
regarding new entrants that fall largely in the realm of competition law
and are generally beyond reach of procuring entities. Since the legisla-
tor also allows for the discontinuation of procurement tenders and even
provides stipulations that seek to ensure that competitors are not unfairly
excluded from tenders, this element is evaluated positively.
An area giving rise to much concern from an auction theoretic perspective
is the possible responses of the auctioneer. The lack of an express stipulation
in the GPL to prohibit the disclosure of any information regarding poten-
tial bidders is viewed critically since it may negatively impact upon bidder
participation. Even worse, the Chinese public procurement legislation
contains elements that artificially reduce the number of bidders in the areas
of tender publication, the costs of submitting a tender, national bias and the
treatment of consortia. From an auction theoretic perspective such effects
are evaluated very severely since a large number of bidders in a tender is
identified as a very potent tool to obstruct cartel formation. On the positive
side, however, it also bears mentioning that the Chinese legislation allows
procurement entities to maintain secrecy in respect of bid ceilings.
Last but not least, if multi-unit auctions are being used, closure rules
that limit the possibility of retaliation and detection should be employed
to the fullest extent possible. It appears, however, that on most occasions
closed, sealed bids are the default method of auction schemes.
All in all, it can be concluded that while the Chinese legislation partly
follows auction theoretic insights, in other important areas auction theory
predicts that the current legislation may not succeed in obstructing cartel
formation sufficiently. While the legislators concern for corruption is
recognized and accepted as a policy choice, this cannot help to explain
provisions that undermine bidder participation.
3. CHINESE PUBLIC PROCUREMENT LAWS AND

CARTEL STABILITY
After having analysed the suggestions that law and economics theory
offers to public procurement entities, this section examines how the
Chinese legislator addresses the problem of cartel stability. As in the

case of cartel formation, so too, regarding cartel stability, there is no

information available on the actual practice of procuring entities and how
the industrial economic insights are valued. Consequently the following
passage considers sanctioning and detection from an auction theoretic
perspective only.
With regard to the first issue, sanctioning, it does not appear that the
Chinese public procurement laws facilitate the use of in-auction sanction-
ing mechanisms during the procurement process. Yet it has to be observed
that the BL appears to be particularly concerned with corruption and not
with bid rigging. Some stipulations that establish a very strong degree of
transparency that is conducive to avoiding corruption have the undesir-
able side effect of facilitating bid rigging conspiracies by making possible
the detection of cheating by cartel members. The GPL, in contrast, seems
to employ a dual approach. By employing procedural provisions for
open tenders under the BL, it also incorporates an anti-corruption focus,
while the other tendering mechanisms appear to present a more balanced
approach.
Criticism from a law and economics perspective is closely related to
the detection of cartel agreement renegades. Detection is helped by the
transparency of the procurement system. Criticism does not extend to the
public disclosure of the winning bidder22 which is a general feature of
public procurement systems but to the opening of bids in the presence
of all bidders.23 Even worse, the names of bidders, the submitted prices
and the main content of the bidding documents is announced on such
occasions.24 Such practices do not only directly introduce all bidders to
each other but also allow them to take full note of the price and content of
their competitors submissions. This is expected to facilitate the conclusion
of future cartel agreements and cartel stability by providing cartels with
effective monitoring possibilities. In addition, it can very well be expected
that the danger of revealing sensitive cost and other strategic information
to competitors will scare away potential bidders from participating in
public tenders.
As well as the excessive transparency described above, a further point
of criticism is closely related to the object and purpose of administrative
law. While, from a public procurement point of view, winner selection
criteria should be open and transparent to prevent exposure to charges
of corruption, auction theory suggests that arbitrary selection procedures

23 BL, Art. 35.
24 Ibid., Art. 36.

undermine cartel stability. Selection procedures based on, for example,

environmental or labour standards are expected to make the detection
of renegades difficult. This, in turn, decreases the likelihood of a cartel
cheater facing sanctions and consequently makes it more attractive to
default on a cartel agreement. Hence, arbitrary award criteria can be desir-
able from an auction theoretic point of view but, of course, run counter to
the fight against corruption and principles of administrative law.
From a law and economics perspective, it can thus be concluded that,
with regard to cartel stability also, there are areas that support bid rigging
conspiracies. In general, the Chinese public procurement regime does not
appear to be facilitating in-auction sanctioning. Yet the current public
procurement system greatly facilitates the detection of cartel renegades
and thus deters cartel cheating. The main criticism is the public opening
of submissions, which reflects the strong focus of preventing corruption.
Although it may be a very respectable policy objective, it may be ques-
tioned if such a degree of transparency is indeed required in light of its
very negative effects on bid rigging conspiracies. Under the current public
procurement regime, bids are opened in the presence of all bidders. Their
submitted prices and parts of their submissions are presented publicly.
From a law and economics perspective, this degree of immediate detection
of cartel violations is expected to effectively dispel any remaining uncer-
tainty regarding breaches of a bid rigging cartel agreement.
Another point of criticism relates to the transparency of winner selec-
tion criteria. Arbitrary selection mechanisms that do not allow cartel
members to determine who will be awarded makes the detection of cartel
renegades more difficult. Bearing in mind that sanctioning mechanisms
are also expensive to enforce, defaulting upon cartel agreements becomes
more attractive. Such auction theoretic suggestions do, however, also
clash with the object and purpose of administrative law, which seeks to
establish, among other things, transparency and openness in procurement
tenders.
It can thus be concluded that economic theory predicts that the current
public procurement regime in China aids the stabilization of bid rigging
conspiracies.
4. CONCLUDING REMARKS
The extent to which the Chinese laws applicable to public procure-

ment procedures are in line with auction theory has been examined, as
well as the ways in which auction theory could be used to prevent bid
rigging conspiracies. By applying economic theory to the Chinese public

procurement legislation, it is shown that auction theory offers concrete

insights that can be employed by procurement entities to undermine cartel
formation and stability.
Taking these insights as a benchmark, it is found that the Chinese public
procurement legislation facilitates the creation of bid rigging conspiracies
and supports cartel stability. The areas giving rise to the strongest concern
include information disclosure, the number of bidders and the procedures
relating to opening bids. While the anti-corruption focus of the legisla-
tion (in particular of the Bidding Law) is very much appreciated, it may
be asked whether, in light of the societal costs, the optimal degree of
transparency has been found. In any event, limiting the number of bidders
may be an area that merits the attention of the legislator. Part of the law
and economics criticism directed against the Chinese procurement laws
is attributable to the very nature of administrative law. Other criticism
does not seem to be attributable to aspects of administrative law and may
therefore merit the legislators consideration since it appears to unduly
favour collusion to the detriment of society and limited public resources.

Japan
Little more than two decades ago, Japan was widely regarded as being
one of the strongest economies in the world, about to overtake the United
States. Much feared as an overwhelming competitor, it was praised for
its low unemployment figures, its harmonic labour relations, quality
improvement practices (kaizen), its good supplier relations, its effective
ministerial guidance and social peace. Much of what was formerly seen
as its key assets in growth are currently viewed as its liabilities, hindering
progressive change. Reform was often seen to be obstructed by senior
politicians, bureaucratic considerations and the vested interests of some
business sectors to maintain the status quo. Today, the intimate relation-
ship between bureaucrats, politicians and business known as the iron
triangle has lost much of its power.
Doubtless, in its recent history, Japan has faced a number of socio-
economic problems, which demanded prompt and cohesive attention.
Among these were bad debts, which have piled up as a result of the invest-
ment bubble and have led the financial sector to the brink of a banking
crisis. Given the opaqueness of the system with its strong monopoliza-
tion of information, predictions of the magnitude of the bad debts have
ranged from 8 to 30 per cent of the gross domestic product (GDP). Rising
unemployment figures would have invited governmental stimulus if Japan
wanted to follow Keynesian policies to bring people back into employ-
ment. Given the rapidly rising public debt, which has severely curtailed
any fiscal agility, it became apparent that enhanced business confidence
had to stem from credible commitments to reform. The current economic
situation was, and still remains, aggravated by the presence of deflation,
which is not a conducive environment for efficient economic planning
and investment. Unemployment figures remain too high for a society in
which work is regarded as a defining feature of self-esteem and social
recognition. Rising foreign direct investment and foreign pressure in
Japan, demographic changes, and a strengthening recognition of small
and medium-sized enterprises lend pressure to the existing socio-economic
structure of Japan. One important element of reform was the reinvigora-
tion of competition.
Competition in Japan has been viewed as something unpleasant and
137

undesirable in that it entailed conflict. In societies that cherish harmony

and mutually beneficial and acceptable conduct in a wide range of human
interaction, this does not come as a surprise. The brief account of the
development of the Japanese anti-monopoly law presented below will bear
testimony to the difference in the Japanese approach to competition and
the role that law and the enforcement agency have played.
From its very beginning in 1947, the Japanese anti-monopoly law
(AML) has faced much opposition and criticism.1 Perhaps even worse,
it faced a high degree of misunderstanding.2 It was very much alien to
the common understanding of how business should be conducted, about
how people should interact in close and repeating business transactions
based upon trust and loyalty. The attempt by the Supreme Commander
of Allied Powers (SCAP) to install democracy by destroying the zaibatsu3
and the control agencies,4 and by installing the AML,5 were in part suc-
cessful but could not prevent the continuation of the pre-war economic
order.6 SCAPs actions were regarded as an attempt to destroy the war-
1 Act on Prohibition of Private Monopolization and Maintenance of Fair

Trade (Act No. 54 of 14 April 1947) (hereinafter anti-monopoly law or AML).
Despite the opposition of economic bureaucrats and big business, their more
lenient proposals Schaede (2000), 74, states that the Ministry of Commerce and
Industry (later Ministry of International Trade and Industry (MITI) renamed
Ministry of Economics Trade and Industry (METI)) drew up a marginally revised
version of the 1931 Important Industries Control Law which was not quite what
SCAP had envisaged were not entertained by SCAP and the strict versions of the
AML and the Trade Association law were implemented with only one significant
change: the removal of the treble damages provision of private law suits. See
Beeman (1997b), 39. With regard to civil servants lack of sympathy for the AML,
see Johnson (1982), 221.
2 Johnson (1982), 175, reports that some of the Japanese bureaucrats were
indeed puzzled by SCAPs proposals. Headley (1970), 120, states that its critics
found it difficult to understand why one would need a Deconcentration Law (Law
No. 207 of 1947) and an antitrust law.
3 The zaibatsu were large, often family dominated, holding companies which
traditionally had been very influential and contributed substantially to Japans

war effort. Nissan, generally cited as one of the ten zaibatsu, has never been family
dominated. See Headley (1970), 21.
4 Control agencies (tseikai) were special legal entities, comparable to a
government-authorized cartel with compulsory membership, whose explicit func-

tion it was to allocate raw materials, set prices in line with government orders and
distribute products to the member firms. See Johnson (1982), 153; Schaede (2000),
251 ff.
5 The interested reader is referred to Bisson (1954), Headley (1970) and
Yamamura (1967).
6 See Headley (1970), 69, 79, 99, 115 and elsewhere; but also Johnson (1982)
for insights.

Japan 139
riddled Japanese economy and, as intended, to hinder its development.7

The strong anticompetitive-oriented establishment,8 Marxist oriented
economists,9 industrialists in America10 and Japan as much as the general
publicwelcomed the emasculation of the AML,11 which finally took place
when SCAP left the country.12 The Japanese could continue to emphasize
harmonic collusion13 and cooperation over cut-throat competition.
Despite the activism of the Japan Fair Trade Commission (JFTC)
regarding restraints of competition and price-fixing cases,14 the decade
of the 1960s has to be viewed as one of relatively weak antitrust enforce-
ment.15 Though considerably stronger than the 1950s, pro-collusive forces
were in effect shaping the regulatory framework16 and contributed to a
reduction in enforcement statistics, particularly after 1964 when Japan
assumed more international obligations.17 Increased recognition of con-
sumer interests led to more active enforcement at the end of the decade.18
During the 1970s, the Commissions enforcement potential rose con-
siderably. This was in part attributable to the Nixon shocks,19 the oil
7 See Headley (1970), 11.

8 Indeed, viewed historically Japan fared well by emphasizing cooperation
and market allocation over free competition: see Schaede (2000), 74.
9 Gao (1997), 6163, describes the Marxist orientation of Japanese economists.
10 See Yamamura (1967), 33 ff.
11 See Bisson (1954), 187 ff; Schaede (2000), 76.
12 Law No. 214, promulgated on 18 June 1949.
13 Beeman (1997b), 41, states that the conservative groups within society were
generally hostile, while the socialist and communist groups saw the AML as an
American tool to subdue Japan and the inherent dangers of monopolization could
not be overcome by it; the generally supportive social democrats were weak and
fractioned, were not convinced of the legislations effectiveness and demanded
several AML exemptions. Yamamura (1967), 55, states that the socialists and
labour unions half-heartedly opposed the AML amendments, while small and
medium business and consumer groups fiercely opposed them.
14 Schaede (2000), 161.
15 While Yamamura (1967), 84, and Schaede (2000), 97, view the prospects of
effective AML enforcement with serious doubts, other authors such as Beeman
(1997b), 48 ff; Mitsuo Matsushita (1993), 82; Iyori, Uesugi and Heath (1994), 13ff,
consider the broader picture and argue that, while the JFTC had to give ground in
some areas, it advanced in others.
16 See Schaede (2000), 86.
17 See Johnson (1982), 264.
18 The Law against False Product Advertising and Labelling and Unjustified
Premiums, Law No. 154 of 15 May 1962 and the Consumer Protection Fundamental
Act, Law No. 78, enacted 30 May 1968, widened the scope of competence of the
JFTC. See Schaede (2000), 138. See also Iyori, Uesugi and Heath (1994), 6370 for
the most elaborate representation.
19 The introduction of a 10% surcharge on Japanese imports in 1971 was a

crisis and the general poor economic situation.20 The JFTC stepped up its
enforcement, also in respect of larger companies21 and, for the first time,
the Tokyo High Court ruled that the widely used administrative guid-
ance was insufficient to allow illegal cartels.22 The reform of 1977 was the
first to unambiguously strengthen the AML.23
The economic hardships of those industries that depended heavily on
energy imports and on the exchange rate were supported by the Depressed
Industries Law (197883) and its successor, the Industry Structure Law
(198388).24 The Ministry of International Trade and Industry (MITI,
now the Ministry of Economic Trade and Industry (METI)) helped indus-
tries to scrap excess capacities. The relationship between the MITI and
the JFTC moved from being rather antagonistic to one characterized by
cooperation. The specific provisions for depressed industries were phased
out at the onset of the bubble economy (198791). Despite a compara-
tively low enforcement record during the 1980s, a fundamental change in
enforcement patterns towards bid rigging is recognizable.25 This, in turn,
underlines the newly gained confidence of the JFTC. As can be seen from
the large number of changes the AML has undergone over the decades,
the guardians of Japanese competition policy have been quite active in
strengthening the legislation and enforcement potential. While it has often
been argued that on paper Japans antitrust legislation looks good while
in practice it is but a shadow of its potential,26 the most recent reforms in
Japan are indeed very promising and reflect favourably upon an emanci-
pated legal regime.
This historic introduction is, of course, too concise to give a full over-
shock because Japan was heavily dependent on US exports and had maintained
a fixed exchange rate since 1949: see Gao (1997), 181, and Yamamura (1967), 29
ff. The reassessment of Sino-American relations was a major political shock for
Japan: see Buckley (1999), 120 ff. Despite the signing of the Sino-Japanese Peace
and Friendship Treaty of 1978, the relationship between the two nations is still far
from harmonious.
20 See Schaede (2000), 98, and Johnson (1982), 294, 298300.
21 Schaede (2000), 99.
22 For this case see Haley (1998), 899. The court decision was taken in 1980.
23 See Beeman (1997b), 159 ff.
24 See Beeman (1997b), Ch. 6; Schaede (2000), 103; Young (1991), 137; Tilton
(1996), 39 ff.
25 While only slightly more than 30% of the formal actions (in comparison
with over 70% in 196776) regarded price fixing during the period 197786,
unfair trade practices and retail price maintenance cases more than doubled and
bid rigging more than quadrupled, reflecting favourably upon the newly gained
confidence of the JFTC.
26 See Martin (1994), 66.

Japan 141
view of the development of competition enforcement in Japan but I hope

to have presented the essence of it. A full chapter on the changing fate in
the history of the Japanese Fair Trade Commission and its continuous
struggle to fiercely implement the anti-monopoly law and to maintain
its independence is included in Appendix III. Here, careful consideration
will be given to the relevant industrial policy, as institutionalized by the
Japanese Ministry of International Trade and Industry, and the politi-
cal developments to the extent that they allow a better understanding of
the process of emancipation of the JFTC. The text will shed light on the
different perception of competition in Japan and enable the reader to
understand that the Japanese notion of competition is different from an
occidental one.
The decision to put this information in an appendix pays tribute to the
object and purpose of this book, which is particularly interested in the law
and economic approaches to bid rigging. The remainder of this section
will therefore address this research more directly. Chapter 9 examines the
effectiveness of the current Japanese legal system to contain bid rigging
conspiracies from a law and economics perspective. After pointing out
critical areas of law enforcement and under-deterrence, the following
chapters examine how industrial economics could be used to gain market
insights. The Japanese construction sector is used as an example to show
the kind of insights that could be gained by a closer examination of a
particular industry.

Bid rigging in Japan
9. The effectiveness of the legal

regimeapplicable to bid rigging in
Japan
1. INTRODUCTION
This chapter analyses whether the legal framework governing bid rigging
conspiracies in Japan deals effectively with them so as to allow govern-
ment entities to procure at competitive prices. It thereby draws upon
the law and economics insights presented earlier in this book regarding
optimal deterrence. It measures the current legal framework against
the law and economics findings and examines whether the incentives
created are sufficient to induce bidders to comply with the law. This
approach is necessary since there is no hard empirical evidence available
that confirms that bid rigging conspiracies in Japan are widespread and
inflict considerable damage upon society. Anecdotal evidence reported
earlier, which suggests a general dissatisfaction with the price level
and the quality procured, is therefore complemented by this theoretic
treatment.
2. THE LEGAL FRAMEWORK APPLICABLE TO BID

RIGGING IN JAPAN
This section outlines the legal framework that may be applied to contain
bid rigging conspiracies in Japan and analyses it from a law and economics
perspective on the basis of the theoretical framework presented above to
examine the effectiveness of the current framework.
This chapter is structured as follows. Tort law will be examined first,
followed by the anti-monopoly law (AML).1 Last but by no means least,
the laws addressing civil servant involvements in bid rigging conspiracies
(the Local Autonomy Act and the Act concerning the Elimination and
Trade (Act No. 54 of 14 April 1947).
142

Bid rigging in Japan 143
Prevention of Involvement in Bid Riggings) will be considered. A conclu-

sion summarizes the main findings.
2.1 Tort Law
The Japanese Civil Code, Article 709, provides for damages in tort since
a person who has intentionally or negligently infringed any right of
others, or legally protected interest of others, shall be liable to compensate
any damages resulting in consequence. Consequently a plaintiff will have
to establish intention or negligence, unlawful conduct, causation and
damage.
In bid rigging cases establishing damage is complicated by the fact that
procurements can be very specialized, the competitive value of the tender
may not easily be determined and is in general determined by comparing
the actual financial results from the pre-violation or pre-cartel period
with those of the violation or cartel period.2 In such cases the Japanese
Civil Procedure Act (Article 248) allows the court to establish a reason-
able level of damage. This is reported as falling within the range of 5 to
13 per cent.3 It bears mentioning that joint tortfeasors are jointly and
severably liable,4 thus preventing a judgment proof problem from
arising.
In respects other than damages, however, the burden of proof
under the tort law provision may constitute an obstacle, and it may
be expedient to wait until the JFTC has issued a judgment in the case
even though this is not legally required. In such a case, during the fact-
finding stage of the civil proceedings the established infringement of
the anti-monopoly law will give rise to the presumption that unlawful
conduct has taken place and that there has been intent or negligence5
thus only damage and causation need be established. Given the heavy
burden of proof under the general tort law provision, this enforcement
route against bid rigging conspiracies appears to be ineffective. The
reason why plaintiffs may prefer to rely on the tort law provision (in
those cases where there is also an established AML violation) is that
2 Kawai and Shimada (2011), 164.

3 Ibid., 164. Van de Walle (2011), 23, suggests a slightly lower range for
private enforcement damages awarded by courts, ranging from 5 to 10 per cent of
the contract price.
4 Japanese Civil Code, Art. 719, and Kawai and Shimada (2011), 167.
5 See Inoue (2007), 123, and Van de Walle (2011), 9.

claims can be brought before the district court of the place where the
tort occurred.6
In a few recent cases other provisions of the Civil Code have also been
used: Articles 703 and 704 on unjust enrichment. In the context of a
bid rigging conspiracy the plaintiff argued that its contract was invalid
because it resulted from an illegal bid rigging and that the higher price
paid resulted in unjust enrichment.7 However, the majority of cases
appear to be brought under the general tort law provision presented
above.
2.2 Anti-monopoly Law
Bid rigging cartels8 are prohibited by Article 3 AML as an unreasonable

restraint of trade; this term is defined in Article 2(6) AML as such business
activities, by which any entrepreneur,9 by contract, agreement or any other
means irrespective of its name, in concert with other entrepreneurs,10 mutu-
ally restricts11 or conducts12 business activities in such a manner as to fix,
maintain, or increase prices, or to limit production, technology, products,
facilities, or counterparties, thereby causing, contrary to the public interest,13
6 See Code of Civil Procedure, Art. 5(9).

7 See Van de Walle (2011), 10 and case law contained therein.
8 The per se illegality of cartels of s. 4 AML was altered by the
second amendment of the AML in 1953 into a conditional prohibition, as

outlined in the following passage. The absence of per se illegality of cartels is
much criticized bythe US and forms an important point of criticism: see USTR
(2002), 6.
9 The term entrepreneur appears to be broadly construed and is not limited
to competitive relationships: see the Newspaper Distribution case (Tokyo High

Court, 9 March 1953).
10 Entrepreneurs must be in a competitive relationship with each other: see
Wakui (2008), 53.

11 Mutual restrictions are required under the definition of unreasonable
restraint of trade since they coerce the parties compliance with the concluded
agreement. The fear that amicable or peaceful relationships between two competi-
tors could break down can already be qualified as satisfying the mutual restriction
criterion. An equal restriction between competitors, as was suggested by the
Newspaper Distribution case (above note 9), is not required. See Wakui (2008), 56
ff.
12 Wakui (2008), 61, states that Art. 2(6) AML is not enforced in relation to
activities that are not accompanied by mutual restrictions. As an explanation she

suggests that such an interpretation of the article may help to avoid the problem
of over-deterrence.
13 See Mitsuo Matsushita (1990a). Negishi (1990), 7, cites the Oil Cartel Price-
Fixing case (24 February 1984, Keishu, 38/4 (1984) 1287 et seq.): the Supreme

a substantial restraint of competition14 in any particular field of

trade.15
This implies that the JFTC has not only to ensure that the Articles
requirements are met with regard to entrepreneurs and other entre-
preneurs, the anticompetitive effect of an agreement and that it contra-
venes public interest etc., but also that the cartel has been carried out.16
Court stated that the primary objective of the AML was to generate free and
fair competition in order to foster democratically a healthy development of the
economy by maintaining the interests of the general consumer. Negishi continues
(at p. 15) that the Supreme Court established by this decision that, even if the prin-
ciple of free and fair competition has been violated, it should be compared with
the interests of the producers if it does not curtail consumer interests and if it does
not have negative effects on the whole economy and democracy. Thus, at least
regarding the legal principles, the understanding of the JFTC and the Supreme
Court are comparable; see also p. 16. While Mitsuo Matsushita (1993), 95 ff, inter-
prets the redeeming virtues as being apt to compensate society for a substantial
restraint of competition, the Supreme Court interepreted them in accordance
with the Oil Cartel Price-Fixing case mentioned above as referring to pollution,
preservation of good morals, and the elimination of dangers to public safety. As
can be seen from the above, public interest is different from a minimization of
the dead weight loss as an effective benchmark for social welfare maximization
suggested in Chapter 2. As experience in the EU and the Netherlands show, the
replacement of the generic goal of antitrust policy by a general or public interest
criterion leads to an increase in the inefficiency of competition policy and thus to
an enforcement reduction. For a good economic analysis see Maks (2002). The
public interest criterion in Japan has been understood to be more in favour of
enterprises, particularly large businesses rather than the consumer. The periods
of strong ministerial influence in Japan, presented in Chapter 3 of this research,
however, are certainly over. Perhaps in the future consumer interests will be recog-
nized more. A meaningful start has been made by consumer groups, which are very
concerned about food safety, food security and false labelling.
14 Mitsuo Matsushita (1993), 94, states that the Supreme Court interpreted
substantial restraint in the Toho-Shintoho case (Decision of the Supreme

Court, 25 May 1954, Minshu, 8/5 (1954), 950 et seq.) as follows. Competition is
substantially restrained if an enterprise or a group of enterprises can determine
prices and other items of business independent of market forces, i.e. that there
exists dominant power in a market so that the price and terms of business can
be manipulated. Substantial restraint resulting from an illegal conduct must be
capable of establishing, maintaining or strengthening market power but it does not
have to be implemented in fact, see Wakui (2008), 62 and Oil Cartel Price-Fixing
case, above note 13.
15 As defined in AML, Art. 2(6).
16 Mitsuo Matsushita (1990b), 41ff, states that the language contained in
Article 2(6) explicitly requires that a cartel agreement substantially restrain com-
petition if it is to be held unlawful and, unless and until the provisions of a cartel
agreement have been carried out, competition is not likely to be substantially
restrained. See also Iyori, Uesugi and Heath (1994), 30. In contrast to this Wakui

In addition, unreasonable restraints such as price fixing, price main-

tenance or its enhancement, the limitation of production, technology,
products, facilities, customers or suppliers, and collusion on the alloca-
tion of markets and customers, are only held to be illegal if the JFTC can
establish the participants intentions and uniformity of conduct as an
indication of an express or tacit agreement. To deem concerted actions
unlawful, as in the US antitrust legislation, a coincidence of action is
insufficient: a certain correspondence of will is needed.17 Wakui suggests
that academics have been supporting a presumptive rule to establish
intention. According to this rule, intention to form an agreement may
be presumed to exist if there has been communicative activity and if,
following the communication, parallel conduct is identifiable that would
have been impossible in the absence of communication and if the paral-
lel conduct is consistent with the communication.18 Thus mere parallel
conduct, as such, is insufficient to establish an agreement within the
meaning of unreasonable restraint of trade as contained in Article 2(6)
AML.
Not only cartelization among companies is caught under the AML.
Article 8(1)19 AML contains unreasonable restraint of competition by
trade associations20 by outlawing any substantial restraints on competi-
tion and unfair trade practices, and the influence or restriction of the
number or activities of entrepreneurs in the respective market.21 Hence not
only undertakings are subject to the prohibition on cartelization, but also
trade associations if they orchestrate collusive practices. Trade associa-
(2008) refers to the Oil Cartel Price-Fixing case, above note 13, and concludes that
the exercise of market power and the raising of a price or the reduction of output
is unnecessary.
17 See Martin (1994), 143, and Decision of the Fair Trade Commission, 30
August, 1949 (FTC Shinketsushu 1-62: Yuasa Mokuzai Kogyo case) quoted in Oda
(1992), 352. Mitsuo Matsushita (1990b), 45, cites the Shodanren case (Tokyo High
Court, decision of 26 April 1961, via Kosai Mishu, Vol 12, No. 4 p. 933), that mere
parallel conduct is insufficient and that intention is required. For a detailed treat-
ment see Iyori, Uesugi and Heath (1994), 27.
18 Wakui, M (2008), 55.
19 As amended by Law No. 259 (1953).
20 Defined as an organization established for the purpose of promoting
the common purpose of member enterprises: Mitsuo Matsushita (1990a), 403.

Restraint of competition by trade associations is subject to imprisonment of up to
three years, or a fine of up to 5 million yen or, if the offender is a firm or a trade
association, up to 500 million yen (s. 89).
21 Mitsuo Matsushita (1993), 145, cites the Barber Shops Association case
(JFTC decision, 11 August 1965, ibid. 13 (1966), 55 et seq.) as a successful applica-

tion of Art. 8(1), first sentence.

tions in Japan have been playing an active role in facilitating the creation
of bid rigging cartels, and also in the area of the construction industry.
As pointed out by Schaede, rigged procurement tenders may also be the
result of customer allocation.22 A customer allocation scheme would fall
within Article 19 AML as an unfair trade practice. Since it would thereby
not be classified as a cartel but an abusive measure, it is not discussed
further. It also bears mentioning that there are to the knowledge of the
author no bid rigging cases that were brought under the more lenient
Article 19 AML that, until the latest reform of 2009, did not allow the
levying of surcharge payments.
As indicated above, the enforcement effectiveness of competition law
is determined by the overall amount of opportunities to compete23 and
the inclination of firms to restrict competition.24 Whether firms choose to
engage in unlawful activities that restrict competition depends on the asso-
ciated costs of establishing and maintaining25 such practices and, of course,
on the punishment incurred when found guilty of violating existing compe-
tition laws. If firms are assumed to act rationally,26 they will restrict compe-
tition when the costs of doing so are lower than the expected benefits.27 The
cost of violation is a function of rigid enforcement (detection) and the level
of the expected penalty associated with a violation. While enforcement is
addressed below, this section examines the level of punishments available
under the AML. The risk of detection is then considered. Since the AML is,
to a large degree, geared to public enforcement, private enforcement will be
considered briefly after public enforcement has been examined.
22 See Schaede (2000), 138.

23 Which are, in turn, determined by the existence of private property rights,
organization of factor markets, influence of the size and nature of the public
sector, as well as the legal framework restricting competition.
24 See Waldenberger (1996), 193.
25 Maintaining a cartel agreement can indeed be costly, since adherence cannot
normally be compelled by legal actions. Retaliation schemes like the basin point
systems create inherent instability if freight absorption and cross-hauling aggra-
vates relationships between participating firms. For a discussion of cartel stability,
the interested reader is referred to Martin (1994), Ch. 6.
26 The interested reader is referred to Becker (1962), 113, who shows that even
economic subjects acting irrationally may chose outcomes similar to those that
rational actors would have selected.
27 If one were to not only punish legal entities but also the decision-makers
directly with sentences for which they cannot easily be compensated by the
company, it might be assumed that incentive structures may be skewed in favour
of refraining from illegal activity. One example is the threat of imprisonment as a
form of legal liability for managers, rather than a monetary amount that could be
reimbursed to them by the company.

2.2.1 Public enforcement

This section considers the penalties for collusion (such as cease and
desist orders, fines and criminal sanctions), followed by detection and
enforcement.
Penalties for collusion The anti-monopoly law provides for a range of

sanctions that may be employed to contain bid rigging conspiracies. Such
cartels are subject to cease and desist orders, surcharge payment orders
and criminal punishment under the AML. Each is discussed in turn.
Private litigation is discussed below in the section on private enforcement.
cease and desist orders While cease and desist orders are administra-
tive measures aimed at directly eliminating violations of the AML, they
are not an effective deterrent in that they do not provide for direct punish-
ments but merely constitute an order to discontinue a practice that contra-
venes the AML. Violating a cease and desist order is, however, punishable
by up to 500 thousand yen28 (around 5,000). Surcharges or criminal
punishments, by contrast, do fulfil a deterrence function that may serve
to prevent undue behaviour ex ante, although it bears mentioning that the
surcharge system is not designed as a punitive measure but only to cream
off a flat-rate percentage levied on the turnover. The amount payable by
convicted companies is thus independent of the actual undue profit earned.
surcharges The surcharges under the AML have been repeatedly

increased and their scope of application broadened. Given the significant
changes in the two most recent reforms of 200529 and 2009, a few words
are in order.
Too many repeat offences and an estimated cartel profitability that
exceeded the surcharge level led to reform of the surcharge regime to
enhance its deterrent effect and to make the leniency rules more effective.30
This leads to (i) a broadening of the range of offences that are subject to
surcharge payment orders, (ii) an increase in the surcharge levels, (iii) the
targeting of repeat offenders, (iv) encouraging early termination, and (v)
surcharge enforcement.
1. Broadening the scope In the 2005 reform of the AML the personal
scope of surcharges was broadened, making surcharges applicable not
28 AML, Art. 97.

29 See JFTC (2005).
30 Inoue (2007), 111.

Table 9.1 Post-reform surcharge levels
Large Small/Medium-sized
Manufacturing 10% (6%) 4% (3%)
Retail 3% (2%) 1.2% (1%)
Wholesale 2% (2%) 1% (1%)
Table 9.2 Surcharges for repeat offenders
Manufacturing 15% 6%
Retail 4.5% 1.8%
Wholesale 3% 1.5%
only to unreasonable restraints of trade on goods and services affect-

ing the price or the quantity, but also to restraints of purchase, market
share, customers and suppliers.31 Also caught is private monopoliza-
tion through controlling the business activities of other enterprises
which restrain the price of their goods or services or which may affect
the price of their goods or services by substantially restraining the
volume of their supply, market share or customers. The 2005 reform
did not, however, encompass the introduction of surcharges for unfair
trade practices under Article 19 AML.
2. Higher surcharge levels The 2005 reform increased the applicable
surcharges. The increase in the level of fines in the manufacturing
sector is particularly noticeable. Table 9.1 presents the post-reform
surcharge levels and the pre-2005 percentages in brackets. The sur-
charges are based on multiplying the indicated percentage with the
sales amount of the relevant goods or services over a period of up to
three years.
3. Repeat offenders The 2005 reform increased the normal surcharge
level by 50 per cent for offenders that have violated the AML in the pre-
ceding 10 years. The applicable surcharges are presented in Table9.2.
4. Early termination Offences lasting for less than two years which
were terminated at least one month before a JFTC inspection and
were committed by non-repeat offenders benefit from a 20 per cent
reduction in the set fines. See Table 9.3.
31 JFTC (2005), 3.

Table 9.3 Surcharges in respect of early termination offences
Manufacturing 8% 3.2%
Retail 2.4% 1%
Wholesale 1.6% 0.8%
5. Surcharge enforcement The 2005 reform also made surcharge orders

enforceable and subject to the payment of interest even if the defend-
ants did not accept them.32 Since the JFTC chooses to prohibit the
enforcement of surcharge orders until it has reached a judgment, the
practical importance of this element of reform is limited.
law and economics appraisal The 2005 reform constitutes an impor-

tant strengthening of the levels of punishment for AML offences. While
the extension of the surcharge system is welcomed, economic criticism
of the AML remained. Economic theory tells us that holding trespass-
ers responsible for the whole duration of the infringement and depriving
them of at least all of the unjustly obtained economic profits is justifiable
on economic grounds,33 and is effective where there is a high degree of
detection and conviction. Examining the Japanese surcharge system,
however, raises serious doubts as to whether this level of punishment
is achieved. Doubts stem from several situations. First, the period over
which surcharges may be levied is restricted and thus does not always
cover the entire period over which trespassers have been benefiting from
their infringements. Second, the actual level of the surcharges is criticized
as being too low; and, third, the lack of flexibility. On a positive note the
introduction of repeat offences was examined.
32Inoue (2007), 112.

33Becker (1968), 207, states that illegal activities would not pay (at the
margin) in the sense that the real income received would be less than what could
be received in less risky legal activities. So, whenever the expected return from
unlawful activity is positive, rational actors are tempted to engage in such activity.
Whether the social cost of internalizing formerly incurred social costs (by recuper-
ating the dead weight loss and monopoly profits from the whole period of legal
violation) is too large or too small, however, is a different matter. If it leads a firm
which was unable to redeem the social costs (disregarding any other punishment
for unlawful activity) into bankruptcy, the associated costs of unemployment etc.
may be so undesirable that a milder sentence internalizing only part of the losses
borne by society may be socially desirable. This, however, may depend as much on
social preferences as on the particular case itself.

1. Duration In Japan the surcharge system limits liability for violations

to three years.34 To the extent that the duration of the violation and
the statutory surcharge level do not create a negative expected value
for those companies engaging in illegal activity, the surcharge system
has to be viewed as being imperfect35 because not all benefits from
violations are eradicated.
2. Surcharge level The JFTC was, for a long time, criticized for only
being able to apply surcharges that were too low to effectively serve
as a deterrent. The 2005 reform significantly increased the surcharge
levels. It remains doubtful, however, that this increase is sufficient.
Experience with price-fixing and bid rigging conspiracies in the US
has, for example, led to the estimate that prices were inflated by
approximately 10 per cent,36 a level which still exceeds surcharge levels
in Japan (except for large manufacturing companies). Data for Japan
suggests that the average undue profit of cartels during a period of 10
years prior to the reform was 8 per cent.37 Thus a maximum 10 per cent
surcharge would reduce the incentives to infringe only if the detection
and conviction rate was very high. Yamada38 correctly states that it is
impossible to determine, by merely evaluating the percentage values
in Japan, whether a certain percentage of surcharge on turnover has a
more deterrent effect. But it is equally clear that the level of fines is one
of the elements that entrepreneurs take into account before deciding to
infringe against the AML. To put the surcharge level into the context
of the probability of detection, it should be observed that the JFTCs
2003 Report of the Study Group on the AML39 estimates the detection
rates will fall within the range of 10 to 30 per cent and therefore even
the new surcharge levels are unlikely to serve as an effective deterrent.
34 See AML, Art. 7(2). A figure which is far lower than the empirical findings
of a study of US industries involved in price fixing (197580), which found an
average cartel life span of 73.8 months: see US Department of Justice (Chemtop)
(2000), 5. In a personal conversation a JFTC official explained that the JFTCs dif-
ficulty in extending the time limitation of surcharges relates to a practical problem.
Firms in Japan are not required to keep accounting books long enough, so that
it is impossible for the JFTC to determine the surcharge level for cartel durations
exceeding three years.
35 Suzuki (1999), 7, outlines that the Japanese three-year limitation potentially
reduces the punishment for long-term violations.

36 See US Department of Justice (Chemtop) (2000), 5. Connor and Lande
(2005), 84, found empirical evidence to suggest that this figure is understated.
37 Inoue (2007), 111.
38 JFTC and Yamada (2001), 5.
39 JFTC (2003), 18.

The present surcharge levels are thus too low and are sufficient only in
cases where the probability of detection is (very) high.
3. Flexibility A further point of critique of the AML surcharge system
that remains even today is that surcharges are not based on the actual
amount of undue profits but are based purely on a fixed, and therefore
inflexible, standard.40 From a law and economics perspective deter-
rence at the margin is the objective since it allows the prevention of
both more and less serious offences that cause detriment to society.
An inflexible standard is unable to fulfil this task.
Repeat offences Another much-lamented aspect of the AML was that

it had no stipulations to contain repetitive violations. To the extent that
repeated trespassing is an indication that the benefits of violating the
AML exceed the costs, an increase in the level of punishment would be
desirable. This criticism found its way into the 2005 amendment of the
AML.41 Repeated violations that occur within a period of 10 years are
fined with 150 per cent of the normal respective surcharge rate. In this light
the increase in the level of surcharges certainly gives them a more punitive
character even though the AML does not intend to punish but to recoup
undue profits.42 Given that the fines remain low under the 2005 reform,
the higher fees for repeat offenders is to be evaluated very positively from
a law and economics perspective since it targets those offenders with a
high incentive to trespass.
The 2005 reform of the AML introduced many important changes and
strengthened the deterrence potential of the law with regard to surcharges.
From a law and economics perspective, however, strong criticism can be
made relating to the duration over which surcharges may be levied, the
still low level of fines (when compared with the detection level) and the
lack of flexibility. The set surcharge level appears to be insufficient to
effectively function as a deterrence tool, thus implying that it is likely to be
profitable for companies to engage in violations such as bid rigging con-
spiracies. The introduction of an additional fine for repeat offenders is an
important step to mitigate those incentives, but its effectiveness depends,
to a large degree, on a high detection and conviction rate.
Shortly after the 2005 reform, the AML was reformed yet again in
40
Iyori, Uesugi and Heath (1994), 912.
41
See JFTC (2005).
42 On this see Iyori, Uesugi and Heath (1994), 912, who use the term
Mehrerlsabschpfung and Gewinnabschpfung (forfeiture of inappropriate

economic gains in the language used by JFTC (2003), 17) and state that the sur-
charge system is not a sanctioning tool.

2009 again with the objective to further strengthen the surcharges that
may be imposed under the law. Unfortunately the above criticism was
not addressed. The reform led to a 50 per cent increase in the surcharge
rates for offenders who played a leading role in the infringement. Such an
increased surcharge rate would thus be applicable for the initiator of a bid
rigging conspiracy (Table9.4).
In addition, the 2009 amendment extended the field of application of
the surcharges but did not lead to their general increase. The reform thus
expands the types of conduct that are punishable by surcharges to exclu-
sionary types of private monopolization. The applicable surcharges here,
however, are lower, reaching only 6 per cent of the sales of goods or serv-
ices, 2 per cent for retailers and 1 per cent for wholesalers.43 Furthermore,
a number of unfair trade practices that formerly were subject only to cease
and desist orders are now also punishable by surcharges. The violations
covered are concerted refusal to trade, discriminatory pricing, unjust low
price sales, resale price maintenance and abuse of a dominant bargaining
position. These surcharges will apply only to repeat violators who infringe
the same statutory type of violation within a period of 10 years.44 The
level of the surcharges is also reduced. The normal level of surcharge for
concerted refusal to trade, discriminatory pricing, unjust low price sales
and resale price maintenance is 3 per cent of the value of sales of goods or
services and only 2 per cent and 1 per cent in the context of retailers and
wholesalers respectively. Abuse of dominant bargaining position is pun-
ishable by 1 per cent of the value of the transactions with trading partners
that were subject to the abusive practices. It is, however, only levied in the
presence of a continuous offence.
Following the 2009 reform the problem of under-deterrence remains.
It is mitigated by the introduction in 2005 of higher surcharge levels for
repeat offenders and by the additional surcharge increase for ringleaders
of cartels introduced in the 2009 reform. It appears that, for cartels not
exceeding three years, ringleaders will be more cautious in organizing a
cartel, particularly if they have been convicted previously. For ordinary
cartel members, however, surcharge levels appear to be too low to induce
behavioural change.
A timely development of the surcharges collected by the JFTC is pre-
sented in Figure 9.1. It clearly depicts an upward trend, which in turn may
43 See also the 2009 Guidelines for Exclusionary Private Monopolization
under the Antimonopoly Act at www. jftc.go.jp/en/legislation_guidelines/ama/pdf/

guidelines_exclusionary.pdf
44 JFTC (2009c), 3.

Table 9.4 The current level of surcharges after the 2009 reform
Manufacturing Retail Wholesale

Large SME Large SME Large SME
Unreasonable 10% 4% 3% 1.2% 2% 1%
restraint of trade
Private 10% 3% 2%
monopolization
(control type)
Repeated 15% 6% 4.5% 1.8% 3% 1.5%
violation, leading
entrepreneur
Early cartel 8% 3.2% 2.4% 1% 1.6% 0.8%
termination
Surcharges for 6% 2% 1%
exclusionary
private
monopolization
Repeat violations 3% 2% 1%
within 10 years
concerted
refusal to trade,
discriminatory
pricing, unjust low
price sales, resale
price maintenance
Repeat violations 1%
within 10 years
abuse of dominant
bargaining
position
suggest more vigorous antitrust enforcement. Yet, as can clearly be seen in

Figure9.1, surcharges levied in Japan are much lower than those imposed by
the US Department of Justice. Whether this is indicative of greater enforce-
ment of competition law in the US cannot be established on the basis of these
figures, but if the propensity to engage in anticompetitive conduct and the
likelihood of detection and conviction were equal, and one would account
for the fact that the US economy is about twice as large as the Japanese, then
clearly higher levels of fines imply a higher level of deterrence.
Criminal penalties Not only cease and desist orders and surcharges are
available under the AML; criminal penalties are also provided for. From

60 1,000
900
50
800
700
40
In million Euro
In billion Yen
600
30 500
400
20
300
200
10
100
0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Beeman Own representation JFTC surcharges in Euro
DOJ fines in Euro Linear (Trendline)
Sources: JFTC data taken from JFTC Annual Reports and Beeman (1997b); US
Department of Justice (2004), (2009) and (2012); European Commission (2009a).
60
50
40
In billion Yen
30
20
10

1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Beeman Own representation
Sources: Pre-1997 data based on Beeman (1997); authors representation based on JFTC
Annual Reports.
Figure 9.1 Surcharge development

an economic perspective it is important to assess whether it pays at the

margin to engage in anticompetitive conduct. To the extent that sur-
charges are too low to serve as an effective deterrent, criminal sanctions
remain decisive. The AMLs penal provisions provide for imprisonment
with work of up to five years45 or a fine of up to 5 million yen (around
50,000). In the case of a legal entity, the fine can rise to 500 million yen
(around 5 million). While the criminal sanctions for individuals appear
to be significant enough to serve as an adequate deterrent, the maximum
fine for a legal entity at 5 million is too low to have a decisive effect on
large companies. Even if it could be assumed that the surcharge system
would ensure that all undue profits would be recouped, the amount
appears to be too low to impress managers of large corporations. On
small or medium-sized companies it may, however, have a deterrent
effect.
The above section on penalties available under the AML to the JFTC
may be summarized as follows. From a law and economics perspective,
the current penalties do not look particularly promising. The surcharge
levels despite their recent strong increases are unlikely to offer high
levels of deterrence. This is based on a number of criticisms.
To eliminate incentives to trespass, cartel members must be deprived of
all undue profits. The duration over which a perpetrator may be punished,
however, is limited to three years. Surcharges are not intended to serve as
a punishment and appear to barely succeed in creaming off undue profits
in cases of large (manufacturing) companies in the presence of very high
detection rates. Furthermore, the surcharge system, with its focus on
standard rates, lacks the flexibility to deter cartels at the margin, giving
cartel members extra incentives to increase prices. On a positive note
even though this does not alter the finding that the surcharge system gives
rise to little deterrence effect it is worth mentioning that the introduction
of an additional punishment for repeat offences and cartel ringleaders
is a good way to reduce the benefits from bid riggings and other AML
offences.
In cases where administrative surcharges are too low to function as an
effective deterrence tool, criminal penalties become important. The AML
allows for an effective level of imprisonment and fines for individuals and
small companies, although for large corporations the available sanctions
appear to be too low.
45 For unreasonable restraints of trade such as bid rigging cartels, this figure
increased from three to five years in the 2009 reform of the AML: see AML, Art.
89, but also JFTC (2009b) for an overview.

Detection and enforcement To prevent violations of the AML not only

effective sanctions are needed but also high degrees of detection. This
section addresses public enforcement. In order to assess the quality of
AML enforcement the Japan Fair Trade Commission, the institution
charged with the implementation of the AML, is described first. The
JFTCs investigative and compliance measures and leniency policies are
examined before presenting descriptive enforcement statistics. These
statistics relate not only to institutional constraints, such as staff and
budget, but also reflect upon its enforcement activities. The section cul-
minates in a law and economics appraisal of the current public enforce-
ment regime.
The Japanese Federal Trade Commission The Japanese Federal Trade

Commission is an independent46 administrative agency that implements
the AML and competition policy. The JFTC has been criticized his-
torically for being influenced by the government, the ministries and the
private sector,47 which in turn casts doubt on the prospects for effective
enforcement. Positive support for law enforcement was expected to stem
from the institutional reforms of 1996 and January 2001.48 Forming part
of a ministry might have led to an increase in its voice in parliament49
and to a reduction of the perceived ability gap of civil servants among
46 Suzuki (1999), 17, questions the relationship between the JFTC and the Fair
Trade Association (Koseitorihiki Kyokai) which provides for some executive posts
for JFTC officials and thus leads to potential vulnerability to business pressure.
Suzuki also notes (at 19 and 21) that 9 out of 15 chairmen have come from the
Ministry of Finance (MOF) and that chairman positions between 1963 and 1995
were taken by MOF or the Bank of Japan and that the JFTC has been reluctant to
intervene in MOFs policies.
47 Private sector leverage enters via descending from heaven (i.e. the entering
of the private sector after having had a civil service career). See Johnson (1982),
63; Buckley (1999), 178 and elsewhere. Suzuki (1999), 11 ff and 17, argues that the
expected benefits from descending are the establishment or strengthening of the
connections through which business interests could be communicated effectively
to influence government policies. Yet, with progressing deregulation, the expected
benefit for enterprises decreases and a positive effect on the private sectors bar-
gaining position is expected. In this context, the author identifies the amicable
relationship between the Fair Trade Association and the JFTC as questionable.
48 In the 1996 reform, the FTC saw the redefinition of the FTC secretariat as a
General Bureau and the upgrading of two divisions into bureaus. Suzuki (1999),
6 ff, notes that this change may well have increased the FTCs power since the new
title puts the FTC on equal footing with other public officials.
49 Since it did not have any representative in Parliament to defend its interests
and to push for amending existing laws, it is hoped that situations may improve
now.

different qualified institutions.50 The ability gap is related to the aca-

demic snobbism of graduates of prestigious universities,51 the perform-
ance of civil servants in the entrance examinations52 and the small size of
the institution, which would allow good bureaucrats to rise rapidly above
their mediocre fellow colleagues.
It has been the declared objective of JFTC Chairman Takeshima to
bring the Commission back53 under its former position of the Prime
Ministers Office. Even though critics saw the potentially positive effects
of placing the JFTC under a ministry, they also feared the JFTC could be
influenced by the Ministry of Public Management, Home Affairs, Posts
and Telecommunications (MPHPT).54 JFTC officials however, stress the
independence of the JFTC.55
In comparison with the more cautious approach under the former
Chairman Negoro, Chairman Takeshima appears to be following a more
50 This passage is predominantly based on Suzuki (1999).

51 For a detailed view on cliquishness and crony personnel policies for MITI,
see Johnson (1982), Ch. 3.
52 This would have been the case if the required score in Level I Examinations
for the National Civil Service were to be more demanding for entering the Ministry
of Public Management, Home Affairs, Posts and Telecommunications than those
for the FTC.
53 Before the restructuring of the central governments ministries and agencies
on 6 January 2001, which transferred the JFTC to the MPHPT, it was an extra-
ministerial body to the Prime Ministers Office. For a detailed explanation of the
2001 Central Government Reform, see Ministry of Foreign Affairs (MOFA) (year
not stated).
54 As an extra-ministerial body (until 6 January 2001) it was not subject to
direct ministerial guidance. Yet it may be noticed that the JFTC depended and
depends on the Ministry of Finance (and the government) for its budget and that
chairmen, commissioners and staff members have been recruited from MITI,
MOFA and EPA. For an enlightening exploration of this and related aspects, the
interested reader is referred to Beeman (1997a). As an extra-ministerial body, the
JFTCs ability to effectively influence antitrust legislation was quite limited, and it
depended on the cooperation of the government (LDP) and ministry to strengthen
the anti-monopoly law, thus potentially introducing political considerations
in antitrust enforcement which potentially undermined JFTCs independence.
Furthermore, critics feared that the Home Ministry would influence JFTCs poli-
cies with regard to the telecommunications sector.
55 JFTC and Yamada (2001), 1, states: The (J)FTCs relations with the
Ministry remain unchanged from its relations with the Prime Ministers Office.
(. . .) The (J)FTC will continue to be independent in strictly cracking down on
Antimonopoly Act violations and actively implementing competition policy. In
a personal conversation with a high ranking JFTC official on 17 April 2003, the
independence of the JFTC was underlined and that the MPHPT had not influ-
enced the JFTCs work.

aggressive line. Also, in part attributable to substantial foreign initiative,56

Prime Minister Koizumi proclaimed that the JFTC would become a part
of the Cabinet Office in April 2003.57 The bill to transfer the Japanese
Fair Trade Commission from the Ministry of Public Management,
Home Affairs, Posts and Telecommunications to the Cabinet Office was
approved by the Parliament on 2 April 2003. It was hoped that this would
enable the JFTC to further break free from outside pressure.58 Looking at
the recent changes, it appears that the new institutional arrangement may
live up to its high expectations.
The Prime Minister, with the consent of both Houses of Parliament,
appoints the JFTCs Chairman59 and the four Commissioners for five
years. A particular feature of the JFTC is that, as an independent admin-
istrative agency, it has the quasi-legislative power of designating unfair
trade practices, premiums and representations, and enacts internal regula-
tions as well as regulations concerning settlement procedures, reporting
and certifications. The JFTC also has the quasi-judicial power to
conduct hearing procedures similar to an open court trial. It also enjoys
the power as an administrative body as it is charged with implementing
the AML and with eliminating violations of the law. It monitors industries
and receives reports and notifications about firms.
investigatory and compliance measures The penalties for obstructing

JFTC investigations have recently been strengthened. Refusal, obstruc-
tion or evasion of on-the-spot inspections (section 94(2)) may lead to
imprisonment with work for offenders of up to one year or a fine of up to
3 million yen. The same punishment applies to persons or experts involved
with a case who fail to appear, fail to submit materials or make statements,
56 The US and the EC have long been suggesting that the JFTC should be
placed directly under the Cabinet Office to maximize its independence.
57 See Prime Minister Koizumis speech before the Diet on 31 January 2003:
Koizumi (2003).
58 Some scholars have emphasized the need for an independent JFTC but
feared that insufficient protection of the JFTC would make it as vulnerable to

outside pressure as the Bank of Japan. Furthermore, an independent position of
the cabinet office, it was feared, could render it more difficult for the JFTC to
summon effective support in the parliament and among ministries.
59 Odake (1996), Gendai Nihon no Seiji Kenryoku Keizai Kenryoku,
3134 (via Suzuki (1999), 23) observes: [S]ince the functions of individual
Commissioners are not differentiated, nor are they placed at particular divisions of
the Secretariat, the Chairman holds an almost exclusive channel of communication
with the Secretariat and with external parties, and this had in substance made the
Commissioners subject to the control of the Chairman.

fail to submit reports or give false evidence.60 The JFTC may also order
employees of an enterprise to present themselves before the JFTC or to
submit reports, information or material. Non-compliance with a compul-
sory measure or testifying falsely is punishable under Article 94(2) with a
fine of up to 200,000 yen (around 2,000).
Despite these punishments to support an investigation, there are still
impediments which bar the JFTC from taking a more active stance.
Although provided with the right to investigate,61 enter any place of busi-
ness, and inspect books and other materials (see Article 47), the JFTCs
effectiveness is limited by having to ask relevant parties to deliver docu-
ments when entering premises. Only in the context of criminal investigations
does the JFTC have substantial powers that include dawn raids. Here, it
enjoys similar powers to those of a public prosecutor (see Chapter 12 of the
AML). The ability of the JFTC to establish facts in non-criminal cases the
vast majority of cases is thus limited by its restricted investigatory powers.
leniency An effective policy tool to encourage violators to provide

further information for the fact-finding investigations of the JFTC, and
thereby help to undermine cartel stability, is the introduction of leniency.
It is thus complementary to a sufficiently high surcharge level and criminal
enforcement. While the protection of whistle blowers is directed against
employees of companies who can be protected against charges, leniency
policies constitute a standardized administrative tool that requires com-
panies to report infringements. Two powerful examples62 where the JFTC
was unable to obtain sufficient information to take action because of the
absence of a leniency policy while other competition authorities were able
to convict cartel members, are the Graphite Electrode63 and the Vitamin
Cartel cases.64 The Economic Affairs Bureau of the JFTC was discussing
the introduction of such a scheme as early as 2003,65 which led to the crea-
60 AML, Art. 94.

61 The importance of antitrust investigation is underlined by the establishment
of an Investigation Bureau and a Special Investigation Department within the
Bureau in June 1996: see OECD (1997), 209, and the strong increase in investiga-
tion personnel from 129 in 1989 to 260 in 1999 (see JFTC (1999), 14) despite a
general downsizing tendency of governmental organizations.
62 This point has been made by Funahashi (2004).
63 Ibid., Annex 2.
64 Ibid., Annex 2.
65 The JFTC recognizes that leniency programmes work best if there are suf-
ficient incentives for cartel members to default. Given the low level of surcharges,
incentives may be limited (based on a personal conversation with a JFTC official);
but see also JFTC (2003).

tion of a leniency policy in 2005.66 These stipulations were strengthened

under the 2009 reform.67
Under the 2009 leniency scheme the JFTC either refrains from order-
ing the payment of surcharges or it orders the payment of surcharges at
reduced rates if entrepreneurs have submitted a report to the JFTC and
cooperated in the investigation. Reports submitted before the start of an
investigation may entitle the first enterprise to a full waiver of the fine.
The second company to come forward will receive a reduction of 50 per
cent. The third, fourth and fifth companies will still benefit from a 30 per
cent discount. If specific requirements are met, the full waiver accruing to
the first company to blow the whistle may also be extended to a second
company within its group. In this case the third company will obtain a
waiver of 50 per cent and the next three companies to come forward will
receive a fine reduced by 30 per cent.
If an investigation has already been started, a maximum of three compa-
nies used to be eligible for a reduced fine of 30 per cent, but now up to five
companies are able to benefit from the leniency policies. This is expected to
make the scheme more attractive for cartel members to confess their conduct.
Leniency not only destabilizes domestic cartels, but also international
ones. International cartel members are more likely to approach competi-
tion authorities if they are protected in all the countries in which they
are operating. Funahashi emphasizes the importance of an international
proliferation of leniency policies and the closer international cooperation
between competition authorities. The leniency policy operated by Japan is
thus positively evaluated from a law and economics perspective.
institutional constraints Before elaborating on the JFTCs enforce-

ment record, a brief review of the institutional resources is in order.
Resources at the disposal of an enforcement agency are crucial to deter-
mine its ability to enforce the law.
The JFTCs staff situation and its financial position have undergone
important changes. Positive institutional developments have seen the
strong increase in both the total number of personnel and, in particular,
the number of investigators, which supports the impression that the
significant legal changes may be followed by perceivable and persistent
results. This can be seen in Figure 9.2. Setting the number of JFTC staff
in relation to the countrys GDP yields a different picture for the 1990s
(see Figures 9.3 and 9.4). The amount of economic activity, measured in
66 See JFTC (2005) and Wakui (2008), 287.

67 JFTC (2009a), 2.

900 12.0
800
10.0
700
Number of people
600 8.0
Budget
500
6.0
400
300 4.0
200
2.0
100
0 0.0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
No. of total staff No. of investigators Budget (billion Yen)
Source: JFTC, Annual Reports on Competition Policy.
Figure 9.2 The JFTCs labour force and its budget
1,200 16,000
14,000
1,000
GDP in billion Euro

12,000
Number of staff
800
10,000
600 8,000
6,000
400
4,000
200
2,000
0 0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
JFTC Staff DG Comp. Staff US DOJ Staff US FTC Staff

GDP EU-15 GDP Japan GDP US GDP EU 25 (27)
Sources: JFTC, Annual Reports on Competition Policy 1998 and 2001, and www.jftc.
go.jp/en/about_jftc/statistics/index/html (accessed 1 December 2012); US and EU staff data
after 2000 taken from JFTC (2010), 26; European Commission (2009b); JFTC (2002b), 28.
Figure 9.3 Cross-section comparison: GDP and staff

25.0
GDP in billion Euro per JFTC staff member
20.0
15.0
10.0
5.0
0.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
JFTC staff JFTC investigators
Sources: JFTC, Annual Reports on Competition Policy 1998 and 2001, and www.
jftc.go.jp/en/about_jftc/statistics/index/html (accessed 1 December 2012); European
Commission (2009b); JFTC (2002b), 28.
Figure 9.4 Cross-section comparison: GDP per staff
billions, that a JFTC civil servant has to oversee does not only compare
unfavourably with the situation in Europe or the US (it bears mentioning
that DG Competition staff are supported by the enforcement agencies
of the Member States) but the situation also deteriorated slightly during
the 1990s. Furthermore, as a result of the decline in the Japanese GDP
(measured in euros) since the beginning of the new millennium, this ratio
has improved considerably. While a JFTC staff member would have over-
sight over 9 billion of GDP in 2000, this figure was nearly halved by 2007
(4.2 billion).68 This can be seen in Figures 9.2, 9.3 and 9.4. Thus it is to be
welcomed that international pressure does not become tired of demanding
even stronger increases in well-educated69 investigators.
It is not only the potency of implementing antitrust law that has
improved considerably over time but also the quality of its staff has been
further enhanced. The JFTC has introduced special training courses70 and
68
Measured in terms of investigators the picture looks even better. While an
investigator had oversight over 19.2 billion in the year 2000, this figure decreased
to 7.8 billion in 2007.
69 See USTR (2002), 23, but also USTR (2008), 20.
70 The first ever JFTC 12-day training course was conducted in September

officials appear to be well informed, diligent and extremely hard-working.

Besides, it is expected that JFTC staff have benefited from the work and
expertise of the Competition Policy Research Centre. Established in 2003,
the Centre is charged with the task of building and improving functional
and sustainable cooperative platforms between outside researchers and
practitioners and JFTC staff members in order to reinforce the theoretical
foundation on which the JFTC operates, plans, proposes and evaluates
competition policy from a current, medium- and long-term perspective.71
enforcement activities In discussing the institutional framework, a

more detailed examination of the enforcement statistics is in order.
Historic data suggests that increasing the number of investigators may not
lead directly to more stringent AML enforcement. Plotting the number
of cases to the number of investigators, as depicted in Figure 9.5, shows
a large variance in the number of cases handled by each investigator. Of
particular note is the continuous decline in workload since the 1980s and
the growing importance of formal actions in the 1990s. This workload
indicates that there are ever more investigators on the cases. This may be
partially explained by the increase in the relative share of formal actions
that is noticeable since the end of the 1980s. Before this time such a strong
relationship cannot be observed. The lack of a clear-cut relationship
between workload and the relative share of formal actions suggests that
there were relevant enforcement factors other than resource availability72
which were influencing enforcement during the period up to the 1990s.
A correlation analysis of the number of formal investigations and
changes in the consumer price index yields considerable support for
the hypothesis that public support plays an important role in antitrust
enforcement. During the period 195389,73 the correlation coefficient
of the inflation rate and formal actions is 0,736 and negative (0,021)
for the period 19902007. The strong correlation and break at the end
of the bubble economy is depicted in Figure 9.6. That the JFTC does
2002. Topics included the history of the AML, key legal rules and guidelines,
legal theory and case law covering restrictive business practices, monopolization,
merger rules and vertical restraints, investigative powers and hearing procedures,
as well as basic economics of competition theory, deregulation in the energy sector,
rules on subcontracting and consumer protection.
71 See CPRC.
72 See Beeman (1999).
73 1953 was selected as a start date because volatile inflation rates and SCAPs
support of the JFTC prior to this date are expected to represent a strong bias of the
data. The end year, 1989, was the end of the bubble economy.

100% 3.5
Formal actions/investigations completed
Total no. of cases/no. of investigators

90%
3.0
80%
70% 2.5
60%
2.0
50%
1.5
40%
30% 1.0
20%
0.5
10%
0% 0.0
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Formal actions/investigation completed Workload (Beeman data) Workload own
Source: Until 1995, based on Beeman (1997b); thereafter, authors calculation based on
JFTC Annual Reports.
Figure 9.5 Investigators per formal action taken: a degree of activism
80 30.0
70 25.0
60
20.0
Formal actions
50
CPI change
15.0
40
10.0
30
5.0
20
10 0.0
0 5.0
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Formal actions CPI change to previous year excluding imputed rent
Sources: Until 1995, based on Beeman (1997b); thereafter, authors calculation based on
JFTC Annual Reports; Bureau of Statistics (2009).
Figure 9.6 Formal actions and inflation

70% 350
Formal actions/actions taken
60% 300
Investigations completed
50% 250
40% 200
30% 150
20% 100
10% 50
0% 0
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Formal actions/actions taken Total number of investigations
Sources: Until 1995, based on Beeman (1997); thereafter, authors representation based
on JFTC Annual Reports.
Figure 9.7 Formal actions as a percentage of cases completed
take action independently of high inflation figures suggests that it has

attained a considerable degree of independence and broken free from its
historic role.
Speaking in 2001, Yamada Akio, former Secretary General of the JFTC,
welcomed the rising number of trials and convictions (see the increases in
the number of formal actions in Figure 9.6) as being promising.74 Yet a
closer inspection reveals that the total number of completed investiga-
tions declined moderately in the 1990s and more heavily thereafter. Only
2009 shows a marked increase in the total number of investigations. If
one considers the increasing share of formal cases in the total number of
actions to be an indication75 of enforcement dedication, the decade of the
1990s depicts a lower level of such dedication than that of the 1970s. The
enforcement dedication has, however, continued to improve under the
present Chairman Takeshima. This is depicted in Figure 9.7. Certainly
one has to recognize that such descriptive statistics do not account for
the anticompetitive effect that is, the quality of actual enforcement
and bearing in mind the information asymmetry with respect to the
actual number of offences committed, it reduces this finding to a mere
observation. Although not conclusive, the data suggests that there are ever
74 See JFTC and Yamada (2001), 6, on the growing number of law suits.
75 As done by Beeman (1999).

100%
90%
Percentage of Formal Cases
80%
70%
60%
50%
40%
30%
20%
10%
0%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Bid rigging Price fixing Unfair trade practices Other
Source: Authors representation of various issues in the JFTC Annual Reports.
Figure 9.8 Decomposition of formal cases
more investigators per case and that even though there are fewer cases
addressed in total they are adjudicated more severely as formal actions.
This may be indicative that the JFTC is targeting larger or more complex
antitrust offences.
Somewhat more promising is Beemans finding that the JFTC has
started to initiate a greater number of cases that involve the condemna-
tion of acts regarding some elements of governmentbusiness relations.76
Unfortunately an empirical examination of the enforcement record regard-
ing the fierceness of AML enforcement could not be produced. Even
though the most important formal cases are outlined in the JFTC annual
reports, the incompleteness of this data effectively prevents a sound
statistical evaluation. What could be produced is a splitting up of some
of the areas of the Commissions enforcement activities. As is shown in
Figure9.8, the 1990s saw increased enforcement in the field of bid rigging
while enforcement remained low in areas other than price cartels.77 More
recent enforcement statistics confirm that bid rigging remains the single
most important enforcement area of the JFTC, but price-fixing cartels
have also gained increasing attention.
76Ibid., 14.
77Beeman, ibid., 12, assumes that it is because of the less clear criteria and that
international support is not comforting enough to JFTC staff members who are
unable to build successful careers outside the Commission.

Table 9.5 Criminal cases
Year Number of cases Violation

2009 0
2008 1 Cartel
2007 2 Bid rigging
2006 1 Bid rigging
2005 2 Bid rigging
2004 0
2003 1 Bid rigging
2002 0
2001 0
2000 0
Source: JFTC Annual Reports.
A concentration on bid rigging appears to be favourable since it does gen-

erate public attention and helps to save taxpayers money. An analysis of
the construction sector predicts that the costs of public construction works
could be reduced by 30 per cent78 if bid rigging practices were eradicated.
The initial success of this strategy can also be supported by data. The
JFTC states that, following the start of investigations, prices decreased by
18.6 per cent on average in 22 bid rigging cases during the period 1996 to
March 2003.79
While the above statistics also include formal cases that led to criminal
convictions, criminal enforcement merits additional attention because
of its important role in increasing the low level of penalties under the
surcharge system. The criminal sanctions discussed above will only be
effective if the threat of initiating criminal sanctions is indeed credible80 to
serve as a deterrence tool. It appears that criminal enforcement has been
extremely rare and not practical as a method of enforcement for most of
78 This passage is based in part on USTR (2002), 6, 237. While I am not aware
of any econometrical analysis in this field, one can only imagine by how far the
actual price of public works would come down if the supplying industries to con-
struction were also made competitive. It would certainly constitute an important
field of research that would help the common public to understand the implication
of a strong and independent JFTC. Furthermore, given the future expenditure on
infrastructure, which are currently planned, a focus on bid rigging appears to be
desirable.
79 See OECD (2008), 68.
80 This point is made by Schaede (2000), 118.

the time.81 In the last few years (see Table 9.5), however, the JFTC has
submitted a number of criminal cases to the public prosecutor.82 This may
give rise to the hope that criminal sanctions may evolve into a reputable
deterrence tool to enforce the AML.
summary of detection issues The above treatment has shown that the
JFTC has grown over time into an independent organization that is both
willing and ever better equipped to enforce the AML. In line with its rising
enforcement powers, the JFTC appears to be targeting larger or more
complex antitrust offences, particularly in the area of bid riggings cartels.
The above examination has, however, also identified a number of critical
points from a law and economics perspective that undermine the detection
and conviction of those who infringe. These points examined above are
related to investigation and compliance.
The JFTC enjoys extensive rights to question individuals and request
information. Unless it already has sufficient evidence for a criminal inves-
tigation the JFTC is more likely to conduct a site visit than a dawn raid. If
the JFTC were vested with powers similar to those of a public prosecutor,
it is argued, an investigation would be more effective, since documents
could be searched and not merely requested.83 Beeman suggests that the
JFTC should be granted the same investigative powers as the National
Tax Agency.84 This suggests that the fact-finding capabilities of the JFTC
may be low in the context of such investigations.
The indirect criminal charges and fines to coerce compliance with the
JFTCs requests during an investigation appear to be sufficiently high to
function as an effective deterrent85 though, of course, violations would
first have to be detected and proved. The 2005 AML has strengthened
the JFTCs powers with respect to criminal investigations;86 the intro-
duction of compulsory measures for such investigations eliminates the
problems from the standpoint of due process regarding Article 46(4)
81 See Iyori, Uesugi and Heath (1994), 101 ff for a good appraisal.
82 It bears particular mention that three criminal investigations took place in
1949 under SCAP). See JFTC Annual Reports.
83 One might have the impression that such a JFTC raid is more akin to a
shopping trip.
84 See Beeman (1999), 17.
85 The US makes similar claims, providing conducive pressure for change. In
addition, the US proposes the extension of cease and desist orders and the expan-
sion of imprisonment for criminal violation and statute limitations to five years:
see USTR (2002), 23 ff.
86 JFTC (2005), 3 ff.

AML and allows the JFTC to transfer evidence to the public prosecu-
tors office.87
The leniency policy appears to be an effective way to mitigate the prob-
lems of fact-finding. It incentivizes whistle blowing and the delivery of
corroborating evidence to the JFTC. In this way the detection of cartels is
increased and cartel stability is undermined.
Criminal cases, albeit on the rise, still appear to be rather rare. It
appears, therefore, that the deterrence effect of criminal sanctions is simi-
larly low.
Law and economics appraisal of public enforcement The AML has

considerably improved its enforcement record. The levels of both pun-
ishment and deterrence have increased. Public enforcement, as the core
branch of antitrust enforcement in Japan, has evidently gained power
in the recent decades. Unfortunately, public enforcement overall is still
found to be wanting, from a law and economics perspective, to deter vio-
lations. On one side the surcharge system is still too low and is only likely
to be effective in the presence of high detection rates, repeat offenders or
cartel ringleaders (the latter two are subject to inflated surcharge rates).
Criminal penalties appear to be adequate for individuals but for legal
entities (particularly if they are not small enterprises) they appear to be
low. So, generally, the costs of cartelization and other violations appear
to be low.
As for detection of antitrust violations, the institutional potency of the
JFTC has been enhanced considerably over time. What still appears to be
in need of strengthening are the JFTCs fact-finding powers during investi-
gations and it being enabled to vigorously enforce the criminal provisions
of the AML.
Since overall public enforcement despite its very noticeable advances
does not yet appear to be effective in deterring bid rigging conspiracies
and other AML violations, private enforcement should play a strong role;
this is discussed in the next section.
2.2.2 Private enforcement

Private enforcement in Japan can take several routes. Individuals may
rely upon the general tort law provision of the Civil Code (discussed in
Section 2.1 above); alternatively they can rely upon Article 25 of the anti-
monopoly law to bring a private action.
Given the heavy burden of proof in the absence of a JFTC decision
87 See JFTC (2003), 32 ff.

under the general tort law provision, a plaintiff could decide to bring
an action under Article 2588 of the AML within three years of the date
on which the JFTCs decision under Article 3 (cartels) or Article 19
(unfair trade practices) of the AML has become final and conclusive.89
Bringing a law suit under Article 25 has the advantage of freeing the
plaintiff from having to prove intention or negligence.90 A drawback,
however, may be that the JFTC decision establishing the violation of the
AML has to become conclusive before a claim may be brought before
the Tokyo High Court, which enjoys exclusive jurisdiction over damage
claims under Article 25 AML.91 Furthermore, according to Article 84
AML, the Tokyo High Court may seek the opinion of the JFTC in cases
where Article 25 AML is invoked. While this provision only offers the
Court the opportunity to seek the JFTCs opinion regarding the amount
of damages, Inoue states that the JFTCs opinion could also extend to
causation.92 The merit of the JFTCs opinion concerning the amount of
damages and its ability to produce relevant evidence is called into ques-
tion since the thrust of its investigations is directed towards establishing
an AML violation and is not concerned with determining the amount of
damages.93
Despite the seemingly better chances for a private law suit under Article
25 AML as a result of its strict liability nature, private enforcement under
both Article 25 of the AML and section 709 of the Civil Code histori-
cally were generally futile. Until 1993 there had been no successful cases
invoking the Civil Code.94 Indeed, the first successful private enforcement
case was the Toshiba Elevator case.95 The low number of private claims is
related to a number of factors:
88 Since the May 2000 amendment of the AML, entrepreneurs engaging in

particular international agreements or contracts (Article 6) and trade associations
engaging in violations of the anti-monopoly law (Article 8-1) fall under the abso-
lute liability clause of Article 25.
89 AML, Art. 26(2).
90 See AML, Art. 25(2).
91 See AML, Art. 85. So, unlike under the tort law provision (section 709 of the
Civil Code) plaintiffs cannot appear before the responsible district court, but must
go to the High Court in Tokyo.
92 See Inoue (2007), 123.
93 Ibid., 124.
94 Iyori, Uesugi and Heath (1994), 84 ff, state that all 15 cases falling under
Art. 25 AML or Art. 709 of the Civil Code have been frustrated.
95 See Inoue (2007), 125: Toshiba Elevator Technos K.K. v Kousei Denki
Yugengaisha, 833 Hanreitimes 62 (Osaka High Court, 30 July 1993).

a prohibitively high burden of proof of the causal relationship

between collusion and injury and the extent of damage incurred;96
difficulty of proving damage;97
strict fact-finding in court;98
the absence of the class action under the Japanese Civil Code;
compensation is limited to simple damages and does not take the
form of punitive or even treble damages, which are viewed as an
effective deterrent from an economic perspective; consequently there
is little incentive for private parties to commence proceedings.99
under Article 25 the plaintiff must wait until the JFTCs decision has
become final and conclusive before bringing a case.100
Private antitrust enforcement, in general, is now facilitated by the intro-

duction of injunctive relief through civil litigation (since April 2001).
Courts may now deal with private civil actions and are required to inter-
pret and enforce the anti-monopoly law,101 but situations that require
injunctive relief are not expected to arise in a bid rigging context.
Even though private antitrust enforcement still continues to be viewed
sceptically, there is now more recognition of its potential role in antitrust
enforcement. This view is based on the increasing number of cases. The
first empirical study on private antitrust enforcement was conducted by
Van de Walle,102 on which part of the section below is based. Van de Walle
analysed 236 private enforcement cases during the period 19802011,
which show that a large number of the private litigation cases until 2002
were initiated under the Local Autonomy Act (addressed below) and are
now initiated under the tort law or Article 25 of the AML. The vast major-
ity of the cases (136 out of 236) are bid rigging cases or price cartel cases
(6 out of 236). This is attributable to the JFTCs enforcement focus on bid
rigging (private litigants are often spurred into action only after a JFTC
decision), and the reluctance of business partners to sue each other.103
Around 27 per cent of the private antitrust cases were wholly or partly
96 Wakui (2008), 298.

97 See Inoue (2007), 126.
98 Ibid., 124.
99 Ibid., 123.
100 See also Kotabe and Wheiler (1996), 79.
101 See JFTC and Yamada (2001), 8; but also Wakui (2008), 298, and Inoue
(2007), 127.
102 Van der Walle (2011).
103 Ginsburg and Hoetker (2006) show empirically that the civil litigation rate
in Japan is rising.

successful on the merits of the case and another 36 per cent of the cases led
to favourable settlements. Most of these successful cases were settled out
of court (78 per cent) and were cases following a conviction of the defend-
ant by the JFTC. These were predominantly bid rigging cases, while the
unsuccessful private cases related to private monopolization and unfair
trade practices. This also explains why around 96 per cent of all entities
that benefit from recoveries were local government and other public enti-
ties rather than businesses (4 per cent) or consumers (0.1 per cent).
Overall the above figures suggest that private enforcement in Japan is
geared mainly towards increasing the costs of infringement rather than
aiding the discovery of violations. Van de Walle finds evidence that private
damages matter in terms of size, and in some years constitute meaningful
additions to the fines levied by the JFTC. From a law and economics per-
spective, however, it would be particularly important not only to increase
the costs of infringement, but especially to improve detection.
Section conclusion Enforcement of the AML has strengthened con-

siderably since the early 1990s. The penalties that are brought to bear
upon AML violators and bid rigging cartels have increased significantly.
Despite those advances, however, the current penalties are unlikely to con-
stitute an effective deterrent. Cartel leaders, particularly if they are repeat
offenders, may well be effectively deterred if detection is sufficiently high
and if private damage claims are also brought. As for detection, here also
major advances have been made. The JFTC is actively enforcing the law
and is prepared to levy surcharges and even to press criminal charges. The
main thrust of the detection work rests upon the JFTC, whose investiga-
tive powers appear to be limited. Private enforcement does not appear to
lead to a high degree of additional detection of violations but contributes
only to increasing the costs of violations. Given the still too low fines, the
deficiencies in the powers of investigation and the apparent asymmetry
between public and private enforcement, it is concluded that the AML has
improved its enforcement tremendously but that enforcement it still not
optimally preventing bid rigging conspiracies.
2.3 Alternative Legal Measures
Tort law and the anti-monopoly law have been discussed in the previous
two sections. There are two additional laws104 that are relevant to address
104 For completeness, it bears mentioning that not only private parties can
bring law suits against civil servants. Civil servants are also liable for misconduct

civil servant involvement in bid rigging conspiracies. Such involvement

by civil servants is a well-noted feature in many countries. Japan, unfor-
tunately, is no exception. Although it is not directly related to private
enforcement of competition law, the possibility for the individual to
address improper behaviour on the part of authorities is briefly considered
here because these legal tools have the potential to help to mitigate bid
rigging conspiracies.105
2.3.1 Local Autonomy Act

The former Article 242 of the Japanese Local Autonomy Act granted any
inhabitant of an ordinary local public body the right to request an audit
of local government finances if an improper use of government finances
is suspected.106 If, on conclusion, the audit had produced no answer or
an unsatisfactory answer, the complainant could file a law suit and show
that the act is illegal. Legal remedies included injunctions, revocation or
invalidation, and a declaration of illegality of the act or omission of such
executive organs or officers. The relatively low costs and the low standing
requirements resulted in a number of such cases before district courts.107
So, in those cases where the local authority did not want to initiate a
legal procedure against a bid rigging cartel (which might be explained by
a long-term relationship between the parties or even the involvement of
the administration) citizens could recoup damages on behalf of the local
authority. Citizens themselves were able to claim back part of their legal
fees if successful.108 The possibility for citizens to sue on behalf of their
local government was removed in 2002.109 Citizens may still seek a court
judgment which obliges the local government to file for damages.110 This is
probably why most parties rely predominantly upon tort law or on Article
25 of the AML.111
From a law and economics perspective it is noticeable that the direct
incentive for citizens to bear the costs of a trial for the common good of
under the Law concerning the Responsibility of Government Employees. Since

this goes too far into the area of administrative law, this issue is not considered
further.
105 With regard to the Local Autonomy Act, see Inoue (2007), 126.
106 This passage is based on Marshall (2001).
107 Inoue (2007), 126, refers to district court cases that were successful, but
were then appealed to the High Courts.

108 Before 2002 this was contained in Art. 242-2(7); it can now be found in
Local Autonomy Act, Art. 242-2(12).

109 See Van de Walle (2011), 11.
110 See Art. 242-2(1)(iv).
111 Kawai and Shimada (2011), 160.

their community is non-pecuniary in nature. It is unclear what motivated

the reformulation of Article 242 and what effect this has had on local
communities. Since it is possible that damages are no longer a basis for
determining the value of a court case, the legal costs for the local citizens
may be reduced by this reform. The new regime also appears to be capable
of forcing local governments subject to bid rigging conspiracies to file for
damages. This increases the overall costs of operating a cartel by enabling
citizens to require their local governments to file damages claims and is
likely to be most effective in situations where a violation has already been
established by the JFTC.
2.3.2 Act concerning Elimination and Prevention of Involvement in Bid

Rigging, etc.
As mentioned earlier, the involvement of civil servants in bid rigging con-
spiracies is a well-noted phenomenon. The Act concerning Elimination
and Prevention of Involvement in Bid Rigging etc. (Law No. 101 of 2002)
allows the JFTC to demand that procuring entities investigate tenders
they have been organizing and report their findings and the actions they
have taken. The law grants the JFTC the right to demand action but
whether or not the procuring entity wishes to entertain such demands is a
completely different matter. This is why public pressure and concern are
conducive to support its enforcement.
If the procuring entity establishes any involvement in bid rigging by one
of its civil servants, it can bring to bear disciplinary sanctions under the
Public Servants Law and the Local Public Servants Law. These measures
are dismissal, suspension of duties, or a cut in salary. Such measures
serve as a deterrent for civil servants from participating in bid rigging
conspiracies.
It is hoped that the publicity generated by the non-binding stipulation
of the law which allows the JFTC to demand the procuring entity to
investigate the involvement of civil servants in bid rigging conspiracies
and to publish a report thereof will, in fact, help to contain bid rigging.
Despite its voluntary character, the law may generate proactive results in
a shame oriented society. The first application of the law was the bid
rigging scandal in the city of Iwamizawa, which led to 91 violators being
surcharged with a total amount of 520,940 thousand yen.112
As the application of the law in Iwamizawa demonstrates, even volun-
tary measures can have a positive effect if they are supported by sufficient
publicity and public concern. Voluntary compliance with the law, as
112 See JFTC (2004).

established under this anti-bid rigging law, can only be complementary to

strong sanctioning mechanisms. As long as effective punishments capable
of internalizing a significant share of undue profits do not exist,113 the
benefits of collusion will be positive.
3. CONCLUSION
Bid rigging conspiracies in Japan are prevented largely by public enforce-
ment actions of the JFTC. Private enforcement mainly enters the scene
after a cartel has been convicted. It thus does not serve to advance the
detection of new bid rigging violations but is geared to increasing the costs
of cartelization via private damages claims under both tort law and Article
25 of the AML.
Public enforcement of the AML has been increasing significantly since
the early 1990s. In particular, the JFTC has succeeded in increasing
the penalties for cartels by increasing both the surcharges and criminal
punishments, and by imposing heavier fines for repeat offenders and
cartel leaders. Despite the significant advances, under-deterrence prevails
because of the still relatively low fines and the short duration during
which surcharges may be levied. The surcharge system appears to be
more adequate in the case of large companies that are repeat offenders
and initiators of a cartel. Criminal punishments for other legal entities,
however, appear to be very low and are most effective in the case of small
or medium-sized enterprises at least if the maximum fine is to be taken
as a benchmark. This means that detection must be very high to reduce the
incentives for cartelization.
On the detection side, the JFTC was able to increase its staff members
and its institutional budget, and has invigorated its enforcement dedica-
tion, particularly by targeting bid rigging conspiracies. Despite significant
changes in this area, the JFTC seems to lack the investigative powers of a
national tax inspector and may therefore not be able to obtain the infor-
mation required for its investigation. Only in criminal cases of which
the JFTC conducts around one every year does it have extensive powers
that enable it to conduct fully fledged dawn raids. In other cases it relies
on the cooperation of the companies being investigated. The leniency
policies are therefore an important asset in the JFTCs arsenal to enhance
113 Certainly a costbenefit analysis of whether infringing pays will not only
consider direct punishments but also the probability of being caught and con-
victed. See Appendix III.

its fact-finding capabilities. Overall it appears, therefore, that bid rigging

is addressed mainly through the public enforcement system where the
level of fines would require a high level of detection. Detection is limited,
however, by the JFTCs investigative powers. Private enforcement is not
able to fill the gap because it relies mainly on concluded JFTC investiga-
tions. Hence the current framework still appears to suffer from under-
deterrence and procurement entities may benefit from taking precautions
to prevent bid riggings.
On a positive note, Japan has introduced laws that expressly target the
close relationship between companies participating in public procure-
ments and civil servants. This is seen as very useful to contain the leakage
of sensitive information and to enhance the number of private claims that
may be brought.

10. The Japanese construction sector
1. INTRODUCTION
The previous chapter examined, from a law and economics perspective,
whether the current Japanese legal framework addressing bid rigging
conspiracies is well designed to effectively contain cartels. This chapter
examines the ways in which the insights into industrial economics pre-
sented above could be employed to prevent bid rigging conspiracies. It
first gives a brief introduction to the Japanese construction sector and bid
rigging. The economic theory is then applied to the Japanese construction
industry to give an example of how general insights can be used to alert
procurement agencies to the industry with which they are dealing. Unlike
other research, it is not the objective here to prove the existence of bid
rigging conspiracies; such research empirically proves often taking con-
victions of cartels as a starting point that bid rigging conspiracies have
been taking place. The research has an ex post orientation since cartels are
proved to exist on the basis of past behaviour. The section presented here
takes a precautionary approach and assesses the structural determinants
of an industry that is believed to facilitate bid rigging conspiracies. By
simple economic analysis that draws from industrial economics insights,
procuring entities can examine a relevant market, assess if cartelization
is likely to be possible and take precautions against bid riggings. The
focus here, therefore, is on prevention rather than on ex post detection or
conviction.
The next section examines the literature on the Japanese construction
industry. The following section applies economics insights. A conclusion
summarizes the main findings.
2. BID RIGGING IN THE CONSTRUCTION

INDUSTRY
Bid rigging practices are thought to be widespread in many sectors in

Japan and the JFTC has considerably increased its efforts at enforcement.
The construction sector has been chosen for analysis because of its eco-
178

The Japanese construction sector 179
nomic importance, its close ties with politicians and the large number of
JFTC bid rigging cases investigated that relate to the construction sector.
Analysis of public tenders indicates that the winning party tends to
be fairly close to the maximum ceiling price that the procuring entity
would be willing to pay. According to a 1998 survey of the Ministry of
Construction, on average winning bidding prices were as close as 95.4 per
cent1 of the ceiling prices of procuring entities. While this may appear to be
outrageous, Coy cites statistics of 1,676 tenders with an average of 99.2 per
cent of the maximum project costs that the procuring entity was willing
to pay.2 Coy continues that in the multiple-round open bidding system
97.9 per cent of the companies that entered the lowest bid in the first
round were never underbid in subsequent rounds and therefore won the
project. More recently, Ishii demonstrates, in her analysis of road paving
in Ibaraki city, that winning bids were around 93 per cent of the ceiling
price during the period 20026.3 This supports the widespread suspicion
that many bids are rigged before the first round of the bidding starts and
that many price ceilings will have been leaked.
The literature tends to identify the closeness between procuring entities
and bidders, as well as the procurement system, that facilitates collusion.
A few Japanese idiosyncrasies must therefore be considered.
First, in a society where cartels are historically at least not perceived
as something negative, but are viewed rather as a well-established means
to mitigate cut-throat competition, and social conformity is highly
regarded, cheating on cartel members could be viewed as being disloyal
to the group and thus lead to unequal treatment in the future. However,
one example is reported by Woodall, who cites a case where a firm was
excluded from future biddings organized by a procuring entity after it had
violated a bidding cartel.4
Second, it is argued that the procurement system, by limiting the number
of qualified bidders for tenders to a maximum of 10, supports the mutual
recognition of interdependence among firms.5 While limiting the number
of bidding participants as such does not lead directly to cartelization, it
makes it easier; this is so particularly if potential bidders can exclude com-
petitors that are not capable or eligible to do the job based on the existing
business evaluation system the system used to attribute a certain
point score to all construction companies. Based on the complexity of
1 Yoshida (2001).
2 Choy (1998), 9.
3 See Ishii (2008), Table 3.
4 See Woodall (1996), Ch. 1.
5 See Beeman (1997b), 276.

the project, procuring entities will determine a minimum point score that
will serve as a minimum entry requirement6 to determine which firms are
eligible to participate in the tender. The required benchmark for the tender
and the business evaluation scores are made public. This effectively limits
the number of potential competitors without any sizable information cost.
If uncertainty still remains regarding the participants in a tender, the
generally good relations between construction entities and civil servants
can be enlightening. Some procuring entities are quite accessible to com-
panies. Good interpersonal contacts provide the framework to exchange
information that is not made public,7 which may yield the required infor-
mation as to who is planning to participate. There may also be cases where
one meets fellow competitors who also try to cultivate interpersonal rela-
tionships with the procuring entity,8 and even more extreme cases where
all bidders requested to take part in a tender are invited by the procuring
entity to an information session on the tender.9
In addition, trade associations at both the national and local level facili-
tate liaison work between bureaucrats and politicians and engage in inter-
firm information exchanges.10 More than 100 of such associations foster
close contacts between executives and create opportunities for greater
communication in the construction industry.
The former importance of trade associations in enforcing bid rigging
agreements has declined since the introduction of the JFTCs anti-bid
rigging guidelines in 1994.11 Ostracizing firms from industry organiza-
tions is not as easy as it was before12 and the number of cases with trade
association involvement has decreased. Thus the importance of such
organizations has shifted from actively promoting and enforcing agree-
ments towards providing a general forum for the exchange of information.
This implies that a method of enforcing cartel stability has been under-
mined. This does not, however, mean that trade associations do not
facilitate the establishment of agreed rules of market conduct. Regular
meetings within the halls of trade associations ensure close contact
6 In addition to this business evaluation score, procuring entities use selective
criteria for the selection of participating companies.

7 Such information is not viewed as being decisive for the official outcome of
the bidding process itself: personal conversation with an industry representative.

8 Personal conversation with an industry representative.
9 Ishii (2008), 5.
10 For a typology of trade associations see Schaede (2000), Ch. 2. She cites the
existence of more than 15,000 associations of the which 3,127 operate nationwide.
11 Personal conversation with a high ranking JFTC official.
12 See Schaede (2000), 170.

between company officials who are believed to use such occasions for
conspiracies against the public, such as bid rigging cartels, rather than
for mere entertainment.
The actual task of lobbying or socializing with officials is carried
out within the so-called fellowship clubs. Such practices set foreign
firms and market entrants at a comparative disadvantage in terms of
forward planning and the like if they do not engage in the same practices.13
The objective of such lobbying may not so much be the actual award of
the contract but to obtain information about who is participating in a
particular bidding, whether or not a competitor should be kept out of the
bidding,14 or to obtain information about the ceiling price. Besides the
temptation of direct kick backs, pleasing potential future employers
at the end of ones civil service career may be a good motivation for civil
servants to cooperate with companies.
Through the procurement system and via trade associations entrepre-
neurs are able to minimize their information costs, are able to realize the
mutual interdependence of their business decisions, are given the oppor-
tunity to foster interpersonal relationships, talk over relevant issues and
engage in lobbying activities. Although these activities support carteliza-
tion, they still do not explain why bid rigging cartels are so successful in
Japan.
It is the collaboration of politicians and civil servants that is decisive.
Communication with civil servants is facilitated by employing civil serv-
ants in the private sector after their retirement from public service.15 These
people do not only command relevant technical and procedural expertise,
but also know the decision makers in the relevant procuring bodies. As a
result of the widespread senpakohai relationship,16 they are assumed to be
able to use their personal relationships to bring about favourable decisions
and to obtain strategic information, such as ceiling prices.
Politicians are asked to exert pressure on civil servants to disclose infor-
mation. Politicians do not only benefit from a contented electorate17 but
13 Personal conversation with an industry representative. According to this

persons experience, foreign firms that engaged in such practices were able to
obtain substantial information.
14 The discretion of civil servants to determine the relevant business evaluation
score and to apply subjective selection criteria is supposed to be large enough.

15 This practice is known as amakudari, which literally means descending
from heaven.
16 The seniority-based relationship between seniors and juniors.
17 As noted above, a large part of the labour force is employed in the con-
struction sector. Furthermore, Woodall (1996), 50, quotes Schoenberger (1989),

who estimates that about one-third of the licensed construction firms would go

also from direct money flows. The kickbacks from excessive bid rigging
profits were estimated in the 1990s to amount to 1 to 5 per cent of the
projects value.18 Despite Japans stringent election laws, the costs of elec-
tions and of pleasing ones supporters are very high. The annual expendi-
ture for a typical backbencher is in the region of 100120 million yen, and
a multiple of this amount during election years.19 Since faction bosses,
the Liberal Democrat Partys (LDP) Treasury Bureau and public finance
account for less than one-third of the costs of a political career, politicians
have to rely on other sources of income. And, indeed, the construction
industry is a major source of funds.20
This system of mutual support, in which everyone gives and everyone
receives along the three sides of whatever is left of the iron triangle,
ensures that bid rigging cartels are able to obtain relevant information.
Cartels in industries in which contracts are infrequent or the variance
of contract values is large, need well-established rules on how to distribute
the gains from collusion. Woodall describes one effective form of sub-
contracting cartel members as a means of distributing gains. Shady joint
ventures (ura jointo) are formed. The company to which the contract is
awarded subcontracts another firm, which in turn subcontracts a third
firm until the original firm is subcontracted again. Money for services
will be paid irrespective of the fact that it is only the originally awarded
company that has done any work.21 There are many other ways in which
the winning party could compensate its fellow competitors.
Established profit distribution schemes can mitigate the incentive for
the individual to undermine a cartel. Given the high transparency of con-
struction work and the publication of bids posted, deceptive behaviour
will immediately be detected. This mitigates the inherent problem of cartel
stability. In such a transparent environment, and in the presence of con-
tinuous relationships, a firms incentive to deceive depends on the size of
the project, the firms inter-temporary discount rate22 and on mechanisms
for retaliation. The only sanctioning mechanism cited in the literature, and
introduced above, was the exclusion of violators by the procuring entity.
Interestingly, it appears that the schemes to orchestrate a cartel are rela-
tively simple. Matsushita, for example, describes the Plywood bid rigging
bankrupt if the government abolished institutionalized bid rigging. Choy (1998), 5,

states that the construction sector is able to motivate 6.5 million voters.
18 Woodall (1996), 40.
19 See Trevour (2001), 193 ff, and Woodall (1996), 95 and 173.
20 Trevour (2001), 188.
21 See Woodall (1996), 45.
22 That is how much the firm values profits today over future profits.

case in which information on the ceiling price was leaked out and became
known among suppliers.23 Suppliers met twice in a restaurant to determine
the winner and a good price around which other cartel members should
bid. In subsequent biddings, a similar process was to be employed and
other suppliers would be designated to win. As a result of the participants
having bid around this good price, the JFTC could establish uniformity
of conduct and thus establish a violation of the AML.
Ishii describes a cartel in which the cartel member with the lowest
cumulative amount of contract values was the next designated bidder.
Such a scheme can be objectively monitored and does not need much
coordination. Arai, Ishibashi and Ishii-Ishibashi have established, based
on JFTC bid rigging convictions, that bid rigging schemes are relatively
simple. Most bidding rings take the observable costs of their members into
account in determining who will be the designated winner, or work on an
equal allocation basis.24
The above can be summarized as follows. The existing designated
bidding practice limits the number of bidding parties and thereby empha-
sizes the mutual recognition of the interdependence of competitors. The
existing business evaluation system allows the identification of potential
bidding parties. These two institutionalized systems support collusion.
Interpersonal contacts with civil servants in the procuring entities effec-
tively complement this system. The discretion associated with the setting
of business evaluation benchmarks and the subjective evaluation of
the procuring entity allows bureaucrats to exclude certain parties from
bidding, as well as those which may undercut a cartel.
While the role of trade associations in direct cartel enforcement is less
illicit, they certainly constitute a forum for an exchange of information
and for forming generally agreed codes of conduct. They not only facili-
tate regular meetings of their member firms but also engage in lobbying
and the communication of views between civil servants and politicians.
Trade associations and firms do not only provide employment for civil
servants on retiring from their career in the public sector, but also give
them presents. This is done to obtain clarity about designated bidding
parties and ceiling prices. Politicians are also supported by the construc-
tion industry to put pressure on the public officials of procuring entities
to leak information and to bring public construction projects to the par-
ticular region.
23 Mitsuo Matsushita (1993), 143 ff; FTC Decision, 30 August 1949,

Shinketsushu, 1(1950), 62 et seq.
24 Arai, Ishibashi and Ishii-Ishibashi (2011).

In industries in which contracts are infrequent and in which the variance

in project values is large, a well-established system of profit distribution is
necessary for cartel stability. Publication of the posted bids and the trans-
parency of building work ensure the detection of cartel violators. Apart
from one case in which a procuring entity excluded a bidding party from
future tendering on the ground of violating a bidding cartel, little is known
about mechanisms to enforce cartel stability.
Bid rigging cartels appear to decide who is going to win a particular
tender and the means of profit distribution. In some cartels, firms take
turns in obtaining public contracts; other cartels allocate shares of the
profit to each member by simply subcontracting them.
3. JAPANESE CONSTRUCTION SECTOR
3.1 Introduction
A general introduction to industrial economics and relevant theoretical

lessons that can be used by procurement authorities to counteract cartels
has been provided above. This section presents a descriptive economic
analysis of the Japanese construction sector to identify elements that could
be interpreted as facilitating collusion.
The Japanese construction industry has been selected because it has
often been associated with bid rigging. Of the 85 bid rigging cases in which
the JFTC took legal action during the fiscal years 20026, 66 were hosted
in the construction sector (a staggering 78 per cent).25 While this may not
help to determine if the industry is prone to collusion or to enforcement,
economic analysis and the presence of factors that facilitate collusion may
help to suggest that collusion is possible or likely to occur. That collusion
has, at least historically, been a serious concern can be derived from the
data presented below. In 1998, the average winning bid price of public
works contracts was equivalent to 95.4 per cent of the set ceiling price,26
which may indicate that sensitive bidding information may have been
leaked and collusion was at work. Furthermore, it is estimated that con-
struction prices could be reduced by 30 per cent if bid rigging were to be
eradicated.27 Rejuvenating the construction sector which is both labour
25 OECD (2008), 67.

26 Yoshida (2001). A ceiling price is the maximum price the procuring insti-
tution is willing to pay.
27 See USTR (2002), 6, 9, 237.

500M
100M500M
50M100M
10M50M
Less than 10M
0% 20% 40% 60% 80% 100%
3 or less 30 03 3 or more
Source: RICE (2009), 7.
Figure 10.1 Operating profit in the construction industry (2007)
intensive28 and accounts for a significant part of the GDP by increased

competition may help the country to bring its ailing economy back on
track.
Observing the above without a sound examination of its proper
economic context could lead to the premature conclusion that the con-
struction industry is prospering. On the contrary, as an industry that
follows the overall macroeconomic situation, company profits on public
procurement contracts have decreased to between 1 and 3 per cent.29 More
recent data seems to confirm that, for the vast majority of companies, the
operating profit margin remains low and that larger firms tend to be more
profitable than small ones (see Figure 10.1).30 This may suggest that the
industry is either not powerful enough to reduce the prices of its suppliers
or it suffers from a high degree of X-inefficiency (that is, the inefficient use
of scarce resources).
In times of tight budgetary constraints and the mounting public debt
burden in Japan, cost-efficient procurement is becoming ever more
28 As measured as a share of the total workforce. Furthermore, such criticism
hints at a low labour productivity.

30 RICE (2009).

important. In order to be able to better understand the effects of possible

measures to counter bid rigging conspiracies, it is important to closely
examine the construction sector from an economic perspective. This
chapter presents an economic evaluation of this sector and factors that
facilitate collusion from an industrial point of view. This approach will
help to shed light upon the question of whether factors that facilitate bid
rigging conspiracies are present in the Japanese construction sector.
It bears mentioning that collusion and bid rigging conspiracies fre-
quently occur in local or regional markets since many companies in the
construction sector are small and are therefore expected to operate in a
locally confined area. The construction sector is also fairly specialized
when it comes to providing infrastructure projects. A company, for
example, that specializes in bridge building may find it difficult to build
tunnels. It thus goes without saying that the construction market is by
no means a homogenous sector, but consists of several highly specialized
crafts with limited ability for substitution.31 Given the often high degree
of specialization, the actual market for competing undertakings for a par-
ticular task may be smaller and characterized by the strong involvement of
a limited number of bidders.
Therefore a close examination of the specific environment of the local
and regional markets of public tenders is important and cannot be sub-
stituted by an assessment of the national construction sector. An analysis
of the national construction sector based on available data can, however,
demonstrate what kind of analysis could be done, what kind of inferences
could be made, and whether procurement entities should take precaution-
ary measures to prevent bid rigging.
Procurement entities could obtain relevant data for the assessment of
a local public procurement market from those companies that are desig-
nated to participate in a particular local procurement tender. Since, under
the Japanese public procurement system, designated bidders are allowed to
take part in specific procurement tenders, information could be requested
that would allow a procuring entity to conduct a similar analysis.
This part of the chapter will present the current position of the construc-
tion industry and will point out if any determinants identified within an
industrial economics framework are present in the industry. The analysis
is based on data taken from the Japanese Bureau of Statistics, the Cabinet
Office and Ministry of Land, Infrastructure, Transport and Tourism.
31 Hence, hit and run competition from construction companies specializing in

a different area may, in particular, be difficult as a successful track record of past
projects is frequently required for public tenders.

The findings are supported by reports from the Research Institute of

Construction and Economy (RICE) and personal interviews with industry
representatives. Besides a general introduction dealing with labour, indus-
try structure and prices, particular emphasis is paid to subcontracting, the
demand side, and the debt burden of the industry.
3.2 Labour, Industry Structure and Prices
The construction industry is one of the largest industries in terms of

employment. As a result of its contraction, employment in the construc-
tion sector declined by 19 per cent from its high in August 1997 to just
under 5.67 million in June 2010;32 since then the industry has slowly
started to recover. Despite the decline in the construction industry that
started in 1992, employment figures increased until 1997; since 1996 about
1.3 million jobs have been lost in the construction sector. The unemployed
are often low-qualified, middle-aged workers who have difficulties in
finding employment in other sectors. Until the same year wages in the
industry were increasing; only thereafter did they decline steadily, and
since 1997 fell by about 15 per cent until 2002.
The number of licensed construction companies have also changed
considerably over time. While in fiscal year (FY) 1992 530,000 companies
were licensed, this figure peaked in FY 1999 at 600,000 and declined to
around 540,000 in FY 2005.33 As depicted in Figure 10.2, around 1314
per cent of people occupied in the sector are self-employed. This underlines
the large number of small firms in the industry; 95 per cent of all licensed
general contracting firms are small firms with fewer than 50 employees.
The size of firms in the construction sector is shown in Table10.1.34 It is
estimated that about 99.9 per cent of all companies are small and medium-
sized enterprises (SMEs).35
More recent data, presenting only those companies with project values
exceeding 1 million yen annually, similarly shows a significant number of
SMEs operating in the construction sector. The number of SMEs in the
market, however, fell by 21.7 per cent between 1996 and 2006, a decline
which is in line with the decline in the number of large companies. This is
shown in Table 10.2.
The large number of SMEs and the still large number of big firms would,
32 This sector accounted for approximately 8% of the total Japanese employ-

ment in 2002: Cabinet Office (2002), 7.
33 RICE (2008), 14.
34 See RICE (2002), 65.
35 Yoshikawa (1999), 119.

900 Employed person Self-employed worker

800
700
600
500
400
300
200
100
0
Jan. 1985
Dec. 1985
Nov. 1986
Oct. 1987
Sep. 1988
Aug. 1989
Jul. 1990
Jun. 1991
May 1992
Apr. 1993
Mar. 1994
Feb. 1995
Jan. 1996
Dec. 1996
Nov. 1997
Oct. 1998
Sep. 1999
Aug. 2000
Jul. 2001
Jun. 2002
May 2003
Apr. 2004
Mar. 2005
Feb. 2006
Jan. 2007
Dec. 2007
Nov. 2008
Oct. 2009
Sep. 2010
Sources: Employed persons by industry and status in employment. Up to June 2009, with
the 10th and 11th revision of the Japan Standard Industrial Classification, Statistics The
Labour Force Survey, accessed 26 August 2009 at www.stat.go.jp/english/data/roudou/index.
htm Ministry of Internal Affairs and Communications, via www.e-stat.go.jp/SG1/estat/
GL32020101.do?method5back, Table 9-1. As of July 2009, with the 12th revision of the Japan
Standard Industry Classification, Statistics The Labour Force Survey, accessed 24 February
2012 at www.stat.go.jp/english/data/roudou/index.htm Ministry of Internal Affairs and
Communications, via www.e-stat.go.jp/SG1/toukeidb/GH07010101Forward.do, Table 9-1.
Figure 10.2 Occupation in the construction sector
Table 10.1 Size of firms in the construction sector
Company size Fiscal year 1998 Fiscal year 1999 Share of total
in 1999
No. of companies No. of companies
4 48,238 47,719 26.9%
549 126,446 121,455 68.5%
5099 5,208 4,812 2.7%
100299 2,394 2,314 1.3%
300999 631 638 0.4%
10001 257 242 0.1%
Total 183,174 177,180
Note: These figures are based on a sampling of Japans construction firms. Sample data
was extrapolated to obtain an approximation of the total numbers.
Source: Annual Report on the Construction Works Survey, 1998 and 1999, Research and
Information Division, Economic Affairs Bureau, MLIT, via RICE (2002), 65.
in principle, point towards difficulty in cartel formation for the purpose of

bid rigging conspiracies because of the large number of actors that would
have to agree and adhere to the cartel. Yet, bearing in mind that cartels, as
well as construction projects, are often territorially confined, this picture

Table 10.2 Number of licensed construction companies with annual

turnover exceeding 1 million yen
Employees 1996 2006

No. of Composition No. of Composition
companies companies
9 or fewer 164,731 55.6% 137,752 59.3%
1099 124,482 42.0% 88,768 38.2%
100999 6,345 2.1% 5,316 2.3%
1000 or more 683 0.2% 527 0.2%
Total 296,241 232,363
Source: RICE (2008), 7.

Construction work price deflator
110
105
100
95
90
85
80
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Integrated construction Integrated civil eng. Public works
Sources: Until 2002 from www.mlit.go.jp/toukeijouhou/chojou/ex/deflators.xls; thereafter

from www.e-stat.go.jp/SG1/estat/ListE.do?lid5000001066165 (both accessed 29 February
2012). Fiscal years, base year 2000. Data for 2008 and 2009 is provisional.
Figure 10.3 Construction work price deflator (2000 5 100)
may be quite different. A detailed analysis needs to be conducted on a case

by case basis to determine if the relevant market is concentrated and hence
more likely to succeed in collusion.
As can be seen in Figures 10.3 and 10.4 below, prices in the construction
sector increased rapidly in the bubble economy, and in the run-up to the
speculation boom, prices rose faster than average price levels. Thereafter
they declined in line with inflation. From 1997 onwards construction
prices started to lag with changes in the inflation rate. Indeed, after 1997
the absolute costs of construction projects started to decline beyond
inflation levels, and only started to outpace the inflation rate after 2002,

6.00%
5.00%
4.00%
Percentage change
3.00%
2.00%
1.00%
0.00%
86
88
90
92
94
96
98
00
02
04
06
08
1.00%
2.00%
3.00%
Integrated construction Integrated civil eng.

Public works Inflation
Sources: Authors representation. Data on inflation (CPI) taken from Ministry of Internal
Affairs and Communications, Report on the Consumer Price Index, Annual Report
2010, Key Statistics, accessed 29 February 2012 at www.e-stat.go.jp/SG1/estat/ListE.
do?lid5000001071315, base year 2005. The other time series are taken from www.mlit.
go.jp/toukeijouhou/chojou/ex/deflators.xls until 2002; thereafter from www.e-stat.go.jp/
SG1/estat/ListE.do?lid5000001066165 (both accessed 29 February 2012). Fiscal years, base
year 2000. Data for 2008 and 2009 is provisional.
Figure 10.4 Construction work price deflator change and inflation
bouncing back in 2009. The development of the price deflator does not
indicate any significant difference between integrated construction,
integrated civil engineering and public works.
Historic international comparison suggests that construction prices in
Japan are indeed higher. Price differences between American and Japanese
projects depend on the particular example taken, but they generally share
in common that prices in Japan are considerably higher. They vary by con-
struction area and over time. Costs in Japan were, for example, estimated
to be more than 300 per cent those of building an industrial facility in the
US in 2002.36 By 2008 the costs of building an industrial construction were
only 70 per cent higher than those in the US.37 Price differences may
be an indication of cartelization or for X-inefficiency. While comparative
price data is not available, it is noticeable that recent construction price
indexes outpace the inflation index. Since X-inefficiency is also thought
to be derived from the insufficient exposure of companies to the forces
36 See KPMG (2002), 49.

37 See KPMG (2008), 59.

Public 27%
Building 6%
Private 73%
Machinery
installation 2%
Civil engineering
19%
Source: Accessed 29 February 2012 at www.mlit.go.jp/toukeijouhou/chojou/ex/jyucyu-e.

xls.
Figure 10.5 Primary contracting (2007)
of competition, the above could be interpreted cautiously as pointing

towards collusive practices.38
3.3 Subcontracting
In 2001 around 67 per cent of all contracts were prime contracts.39 This
figure slowly increased to 69 per cent in 2007. As depicted in Figure 10.5,
73 per cent of primary building contracts in 2007 were of private origin,
while in 2002 similar contracts accounted for only 55 per cent. This reflects
a strong decrease in government building activity of more than 35 per cent
in civil engineering works, machinery and building. In 2007, public civil
engineering works accounted for only 19 per cent, public machinery instal-
lation works for 2 per cent and public building for 6 per cent of all prime
contracts. Even though public entities account for only 27 per cent of all
prime contracts, the public share in civil engineering works is very high
(66 per cent). By contrast, the share of public entities in prime contracts in
building and machinery installation works are lower, accounting for only
10 and 20 per cent respectively.
The subcontracting share in contracts declined when comparing figures
for 2002 to 2007. While in civil engineering contracts, subcontracting
remained stable at 31 per cent, subcontracting in the building sector
declined by 5 to 29 per cent. The worst contraction was in the field of
38 See Figure 10.4.

39 The following is based on the Ministry of Land, Infrastructure, Transport
and Tourism, Current Survey on Orders Received for Construction data set,
accessed 29 February 2012 at www.mlit.go.jp/toukeijouhou/chojou/ex/jyucyu-e.
xls.

machinery installation where the share of subcontracting work in total

installation works fell by 11 to 30 per cent.
A particular idiosyncrasy of the Japanese construction industry is con-
nected with subcontracting. A large number of firms in the construction
sector are not directly involved in construction work but act rather as a
contracting agency which subcontracts complete construction contracts.
For their work, these companies reap part of the profit. Unofficial esti-
mates of such practices are incredibly large, ranging from 30 to 50 per cent
of all companies. Depending on the profit margin of the several layers of
subcontractors, this system effectively reduces the foreign cost advantage
to general contractors. It is believed that the large number of subcon-
tractor layers inflates construction costs considerably.40 This particular
feature of the Japanese construction market will be addressed in more
detail below.
Refusing to deal with foreign companies has been cited as impeding
market entry. According to industry sources,41 however, such refusals are
based less on collusive understandings but are rather to be explained by
the inter-firm relationships between contractors and suppliers. Though
refusal to deal may complicate a contractors work, it does not prevent
foreign companies from operating effectively in the Japanese market.
Furthermore, the current economic situation does not grant many firms
the luxury of being selective about their customers.
In the industrial economics literature subcontracting has been identified
as a means of distributing cartel proceeds. From this point of view the
reliance on subcontracting in the Japanese construction industry should
be viewed critically. Its slight decline in recent years may indicate that the
way business is conducted is slowly changing and that fewer companies
are benefiting from each contract. This, in turn, may suggest that poten-
tial cartel proceeds can be distributed among fewer members. If regional
differences between subcontracting practices in a particular construction
area could be detected, public procurement entities may be well advised to
consider taking precautionary measures.
3.4 Demand Side
It is not only supply side factors that may have an impact on an industrys
propensity to collude, but also demand side factors. These are examined in
the following passage. The Japanese construction sector has been in con-

41 Personal conversation with industry representatives.

Total construction investment

900,000
800,000
700,000
In 100 Million Yen
600,000
500,000
400,000
300,000
200,000
100,000
0
19 0
19 2
19 4
19 6
19 8
19 0
19 2
19 4
19 6
19 8
19 0
19 2
84
19 6
19 8
19 0
19 2
19 4
96
20 8
20 0
20 2
04
06
6
6
6
6
6
7
7
7
7
7
8
8
8
8
9
9
9
9
0
0
19
19
19
20
Source: Accessed 28 August 2009 at www.esri.cao.go.jp/en/sna/h15-nenpou/3main/3gdp/1
nominl/90fcm3n.xls. Calendar year estimates at current prices.
Figure 10.6 Total construction investment
siderable distress. Since its peak in 1992 it contracted by over 30 per cent
to 57.3 trillion yen in 2002;42 this rapid decline is depicted in Figure10.6.
While the industry witnessed annual contractions of up to 10 per cent after
1996, more recent data suggests that the decline in construction invest-
ment has been halted. For two consecutive years (FY 20067), construc-
tion investment rose marginally (by 0.2 per cent on average). Given the
slowdown in the world economy, however, concerns in the industry that
the grave period is over yet appear to be too premature.
According to Cabinet Office statistics, the construction industrys con-
tribution to GDP has declined steadily, from 10 per cent in 1990 to around
7 per cent in 2007, showing slight signs of improvement during the years
200507. See Figure 10.7.
3.4.1 Public sector demand

During the years before the end of the bubble economy, public sector
growth in demand lagged behind the private sector increase. This can
be seen clearly in Figure 10.8. The public share of total construction
expenditure was hovering around 40 per cent but declined after the third
oil crisis and reached about 31 per cent in 1990. The absolute value of
42
Time series on fiscal year investments estimates of the construction industry,
accessed 29 February 2012 at www.mlit.go.jp/toukeijouhou/chojou/ex/estimate.
xls.

12%
10%
8%
Percentage
6%
4%
2%
0%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
2%
19
19
19
19
19
19
20
20
20
20
19
19
19
19
20
20
20
20
4%
Construction share of GDP Annual GDP change

Linear (construction share of GDP) Linear (annual GDP change)
Source: Accessed 28 August 2009 at www.esri.cao.go.jp/en/sna/h15-nenpou/3main/3gdp/1

nominl/90fcm3n.xls. Calendar year estimates at current prices.
Figure 10.7 Size of the construction sector and GDP
600,000 80%
70%
500,000
60%
In 100 million Yen
400,000
50%
300,000 40%
30%
200,000
20%
100,000
10%
0 0%
19 5
19 86
19 7
19 8
19 89
19 0
91
19 2
19 93
19 4
19 5
19 96
19 7
19 8
20 9
20 00
20 1
20 2
20 03
20 4
05
20 6
07
9
0
8
8
8
9
9
9
9
0
0
0
19
19
20
Government investment Private investment

Government share Private share
Source: Accessed 29 February 2012 at www.mlit.go.jp/toukeijouhou/chojou/ex/estimate.

xls.
Figure 10.8 Public and private construction demand

public construction expenditure increased until 1995, stabilized and then

entered a period of accelerated decline in 1998. As a result of ongoing
dynamic fiscal investment over several years during a period of economic
slowdown, the public sectors ability to apply Keynesian fiscal policy
weakened as public debt rose.
Between 1995 and 2008 public sector expenditure on construction fell
by 49 per cent. The decline in local public demand was particularly strong.
Demand by prefectures fell the most (60 per cent) but was closely fol-
lowed by the decline of cities, wards, towns, and villages (57 per cent) as
well as that of local public enterprises (56 per cent).
The decline in local public demand albeit similar in gravity had an
unequal impact on the construction sector. The decline at the provincial
level as well as at the level of cities, wards, towns and villages was strongly
felt in the industry. Their share in total public expenditure fell from 33 per
cent in 1995 to 26 per cent in 2008 and from 30 to 25 per cent respectively.
By contrast, the importance of local public enterprises was already limited
in 1995 and only accounted for 6 per cent of total expenditure. Its share
did not change dramatically over time and was thus of lesser concern.43
By contrast to the development at the local level, public expenditure
increased by the national government and government enterprises by
10 and 27 per cent respectively during the period 19952002. Given the
overall market share of 19 per cent and 5 per cent in 2002, this increase
was, however, not enough to reverse the strong decline in the construction
sector and, overall, public construction demand declined (see Table10.3
and Figure 10.9). The contraction of local government expenditure and
the stagnation of the national government construction expenditure
growth rate since 2000 indicate that expansionary fiscal policy has reached
its limit.44 The presentation of clear statistical quantification of the decline
in national level public expenditure is clouded by breaks in the available
data (this is the case for data on public corporations and government
enterprises). Yet it is apparent that the decline in all national level gov-
ernment expenditure during the period 19952008 of 22 per cent was
lower than the decline in the combined category of public corporations
and government enterprises. Here the decline amounted to 27 per cent
during the same period. It is also noticeable that the total national level
share of total public expenditure increased from 27 per cent in 1995 to
43 Given the strong differences in regional infrastructure stock and the high
number of presumably locally operating small construction firms, this may have
led to unemployment.
44 See RICE (2002), 4.

Table 10.3 Change in public sector construction demand
Total public National Public Government Prefectures Cities, wards, Local public Other
expenditure government corporations enterprises towns and enterprises
Villages
1996 15% 17% 6% 27% 17% 16% 6% 16%
1997 3% 3% 4% 2% 1% 5% 15% 7%
WEISHAAR 9780857936745 PRINT (M3109).indd 196

1998 5% 31% 8% 17% 1% 3% 20% 10%
1999 7% 5% 1% 5% 7% 8% 8% 25%
2000 20% 9% 24% 56% 15% 33% 15% 36%
2001 9% 0% 16% 7% 10% 10% 7% 18%
2002 4% 0% 11% 5% 4% 2% 6% 8%
2003 18% 19% 19% 22% 15% 22% 20%
2004 6% 8% 146% 20% 10% 11% 6% 15%
2005 10% 23% 7% 16% 4% 10% 20% 18%
196
2006 13% 4% 14% 21% 15% 13% 17% 14%
2007 0% 9% 50% 19% 3% 11% 2% 34%
2008 3% 8% 9% 14% 1% 2% 1% 14%
2002/1995 16% 10% 17% 27% 24% 17% 36% 24%
2008/2003 23% 6% 210% 28% 29% 37% 8% 55%
2008/1995 49% 19% 60% 57% 56% 74%
Share in 1995 100% 15% 9% 3% 33% 30% 6% 4%
Share in 2005 100% 19% 5% 9% 29% 29% 6% 3%
Share in 2008 100% 23% 6% 11% 26% 25% 6% 2%
Note: The values for independent administrative agencies and government enterprises demonstrate a change in the time series in the year 2003.
Source: Data up to 2002 taken from Orders Received for Construction (Public Construction), www.stat.go.jp/english/data/geppou/#e, Table E
11; thereafter taken from Value of Construction Orders Received from Public Organizations, www.stat.go.jp/data/getujidb/zuhyou/m02.xls, Table
M2 (both accessed 26 August 2009).
28/03/2013 16:48
Cities, wards,
towns, and
Prefectures villages
26% 25%
Local public
Government enterprises
enterprises,etc. 6%
11% Other
2%
Independent
admin. National
agencies government
6% 24%
Source: Produced from STAT data, accessed 1 December 2012 at www.stat.go.jp/data/

getujidb/zuhyou/m02.xls.
Figure 10.9 Share of total expenditure of public entities in 2008
41per cent in 2008; this further underlines the importance of national level
construction investment and that national government expenditure, in
particular, has become a very important area of public demand. National
level demand, indeed, is nearly as important as the demand of prefectures
and city wards etc., that each amount to around 25 per cent of public
construction demand.
The 47 per cent decline in public expenditure during the years 20008
was particularly hard felt in a number of construction sectors. Among those
hardest hit were waste disposal facilities (82 per cent), electricity and gas
(70 per cent), disaster restoration (60 per cent), land conservation and
development (60 per cent), sewerage (60 per cent) and agriculture, forestry
and fisheries (60 per cent). Strong positive stimulus for the industry came
from maintenance and repair, which declined more slowly than the average
public sector demand contraction (17 per cent) and from roads (128 per
cent), parks (151 per cent), postal services (192 per cent) and others (144
per cent). Of all these, roads constituted the single most important element
in that its average share of all public construction demand amounted to 26
per cent in 2000 and 29 per cent in 2008, and surpassed by far the size of the
other growth areas in the construction sector. See Table 10.4.
3.4.2 Big 50 public expenditure

The 50 biggest manufacturers account for a large part of the local and
national public sector demand. Even though the share of the biggest 50

Table 10.4 Government expenditure allocation
Year Forest Agri- Roads Har- Sewe- Parks Educa- Dwellings Public
and river culture, bours rage tional and office
manage- forestry and facilities dormi- build-
ment and airports and tories ings
fisheries hospitals
1996 23% 13% 19% 13% 9% 0%

1997 1% 4% 4% 20% 12% 24%
1998 20% 1% 9% 36% 2% 13%
1999 14% 2% 3% 1% 16% 11%
2000 62% 0% 17% 53% 31% 35% 32% 24% 25%
2001 16% 12% 5% 12% 18% 13% 1% 12% 2%
2002 9% 12% 10% 28% 8% 4% 24% 10% 6%
2003 26% 21% 12% 6% 23% 20% 29% 22% 23%
2004 2% 20% 9% 76% 0% 12% 21% 2% 6%
2005 6% 4% 9% 57% 7% 24% 11% 19% 36%
2006 22% 23% 7% 10% 16% 24% 9% 6% 1%
2007 6% 10% 4% 1% 5% 23% 6% 32% 25%
2008 8% 3% 4% 17% 6% 17% 12% 43% 4%
2008/
2000 47% 60% 38% 67% 60% 51% 33% 49% 34%
Share
in 2000 11% 7% 26% 5% 11% 2% 10% 4% 2%
Share
in 2008 10% 5% 29% 3% 8% 2% 12% 3% 2%
Note: Data for 1999 for Disaster Restoration and Maintenance and Repairs is based on
www.stat.go.jp/english/data/geppou/#e, Table E 11.
Source: Data up to 2002 taken from Orders Received for Construction (Public
Construction), www.stat.go.jp/english/data/geppou/#e, Table E 11; thereafter taken from
Value of Construction Orders Received from Public Organizations, www.stat.go.jp/english/
data/getujidb/zuhyou/m02.xls, Table M2 (both accessed 26 August 2009).
suppliers in the total public expenditure has declined rapidly since 1996, it
still remains large. As depicted in Figure 10.10, in 2002 the largest 50 firms
accounted for 38 per cent of all public expenditure at national level (in
1996 it was around 63 per cent) and for 15 per cent of public expenditure
at the local level (a decline from about 31 per cent in 1996). In 2007 they
accounted for 37 per cent and 10 per cent respectively. It is noticeable that
the rapid decline in turnover from local public government bodies (60 per
cent during the period 19952007) fell slightly more heavily on the biggest
50 companies whose turnover from local public bodies declined by 63 per
cent during the same period. In contrast to this the contraction of national
government expenditure (27 per cent during the period 19952007) was

Redevel- Land Rail- Postal Elec- Municipal Waste Other Disaster Mainte-
opment conser- roads services tricity and disposal resto- nance
vation and and industrial facili- ration and
and tracks gas water- ties repairs
develop- works
ment
14% 4% 54% 16%

3% 18% 16% 8%
29% 38% 17% 3%
20% 7% 18% 1%
7% 54% 32% 75% 42% 49% 26% 190%
29% 39% 3% 15% 11% 10% 33% 10% 22% 3%
12% 14% 26% 34% 39% 7% 33% 17% 19% 15%
55% 12% 10% 53% 60% 12% 1% 4% 19% 7%
76% 32% 27% 52% 5% 6% 16% 15% 70% 5%
213% 6% 12% 34% 68% 9% 18% 15% 15% 3%
29% 19% 28% 173% 28% 14% 22% 20% 32% 0%
12% 30% 61% 20% 34% 3% 21% 0% 12% 3%
9% 11% 13% 241% 27% 2% 4% 7% 33% 2%
38% 60% 44% 92% 70% 38% 82% 44% 60% 17%
0% 1% 2% 0% 0% 3% 3% 3% 3% 6%
0% 1% 2% 1% 0% 4% 1% 3% 2% 9%
hitting the Big 50 construction companies relatively harder, with a reduc-

tion in their turnover of 34 per cent.
This observation is of particular importance since it implies that large
companies benefit relatively less from national level public expenditure
than from local public expenditure and as indicated in Figure 10.10
national level public construction demand is the main driver (70 per cent
in 2007) of construction demand for the Big 50. The relatively stronger
decline in big firms absolute reception of public national construction
expenditure45 thus contrasts with the increasing national government
45 This suggests that the national government is very concerned about SMEs.
This is in line with METIs concern about recent SME bankruptcy developments.
METIs SME activities were outlined by Professor Ulrike Schaede, Professor
and Director of the ICAP Executive Education Program at IR/PS, University of
California, San Diego, USA, at the Deutsches Institut fr Japanstudien (German
Institute for Japan Studies), Tokyo, 13 March 2003.

4,500,000 80%
4,000,000 70%
3,500,000 60%
In million Yen
3,000,000
50%
2,500,000
40%
2,000,000
30%
1,500,000
1,000,000 20%
500,000 10%
0 0%
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
2099
2000
2001
2002
2003
2004
2005
2006
07
19
National organs Local public bodies etc.

National organs share Local public bodies share
Big 50s share in % of total Big 50s share in % of total
national public exp. public local exp.
Note: The values for independent administrative agencies and government enterprises
demonstrate a change in the time series in the year 2003.
Sources: Data up to 2002 taken from Orders Received for Construction (Public
Construction), www.stat.go.jp/english/data/geppou/#e, Table E 11 (accessed 26 August
2009); thereafter taken from Value of Construction Orders Received from Public
Organizations, www.stat.go.jp/english/data/getujidb/zuhyou/m02.xls, Table M2 (accessed
1 December 2012). Value of construction orders of the Big 50 companies taken from www.
mlit.go.jp/toukeijouhou/chojou/ex/acho-ye.xls (accessed 29 February 2012).
Figure 10.10 Big 50 and public construction expenditure
involvement in the construction sector.46 While, in the late 1980s and mid-
1990s, local government construction expenditure accounted for around
60 per cent of the public expenditure turnover of large construction com-
panies, they now account for only 30 per cent (2007). Since 2000 national
government expenditure has been a more important source of income for
the largest 50 construction firms. While these 50 firms are as severely hit by
the strong decline in local government expenditure as the general construc-
tion sector, they are awarded fewer national contracts than before, and
this is despite the increase in national construction expenditure.
The dependence of large companies on public construction expenditure
is, however, limited. It increased rapidly from about 20 per cent at the
beginning of the 1990s to 36 per cent in 1995, but has declined strongly
46 See Figures 10.8 and 10.10.

since then. While 30 per cent of the turnover of the Big 50s was still coming
from the public sector in 2000, it was only 15 per cent in 2007.
The above is interesting from an economic point of view since it suggests
that large companies are less oriented towards public tenders than they
used to be and that smaller firms are more successful in obtaining procure-
ment contracts. This, in turn, could indicate that the relevant markets for
the purpose of procurement tenders have either become relatively less con-
centrated or large companies are less successful in bidding. This may be
a curious observation if the assumption were true that larger companies,
such as the Big 50, are relatively more profitable than large companies,
as may be suggested by the data in Figure 10.1. Both observations could
be taken as indications that the market is becoming more competitive
provided that there are no confounding social policy considerations
of procurement authorities at work that favour smaller companies (for
example, because of their labour intensity) over bigger (more capital
intensive) firms.
Besides the above, there are other indications that point towards col-
lusion becoming more difficult to organize in the construction sector.
Industrial economics suggest that the expected gains from collusion may
be more limited in a declining market than in a prospering one since the
likely losses cartel renegades face from the breakdown of collusion are
less serious. This impression albeit seemingly suitable for many local
markets may have to be reversed in the case of construction markets
which are more national or supra-regional in nature, since national public
sector construction demand is increasing. While a negative effect on the
propensity to collude may thus be suggested in the public sector, private
sector demand has started to recover and, before the beginning of the
financial crisis and the nuclear disaster in Fukushima in 2011, there were
hopes that the construction sector had reached its low point. This will be
examined further below.
3.4.3 Private sector demand

Since the bursting of the bubble economy at the beginning of the 1990s,
private sector investment declined by more than 40 per cent during the
period 19902002.47 The increase in private sector demand in the middle
of the 1990s is mainly associated with an increase in Japans GDP. In 2003
the private sector demand strengthened again and increased by nearly 10
per cent during the period 20037. Traditionally the private sector is a
more important market participant in the construction sector (accounting
47 See Figure 10.8.

350,000 70%
300,000 60%
250,000 50%
In 100 million Yen
200,000 40%
150,000 30%
100,000 20%
50,000 10%
0 0%
19 5
19 6
19 7
19 8
89
19 0
19 1
19 2
19 3
19 4
19 5
19 6
19 7
19 8
99
20 0
20 1
20 2
03
20 4
20 5
20 6
07
8
8
8
8
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
19
19
20
20
Housing Non-housing Housing share Non-housing share
Source: Accessed 29 February 2012 at www.mlit.go.jp/toukeijouhou/chojou/ex/estimate.

xls.
Figure 10.11 Housing and non-housing private sector investment
for more than 60 per cent of the demand) than in the public sector. In
the years after the bubble burst it declined until 1998 (private demand
accounted for 52 per cent) before it started to regain importance. In 2007 it
accounted for 67 per cent of the total construction demand. This increase
in the importance of private demand is, however, not only attributable to
the strengthening of private demand that started in 2003 but is a result
of a steady decline in public demand (49 per cent during the period
19982007).
Private sector construction demand can be divided between the housing
and non-housing sectors. Since 1993 the former has had a larger share
in private sector demand than the latter. Following a small increase in
demand in 1996, the housing sector declined by 36 per cent to approxi-
mately 18 trillion yen (2003), and was closely followed by the decline in the
non-housing sector of 39 per cent to 12 trillion yen (2003).48 Figure 10.11
clearly shows the decline in both sectors. Both housing and non-housing
demand started to recover in 2004 and increased by 9 per cent and 26 per
48 Based on MLIT data, accessed 29 February 2012 at www.mlit.go.jp/toukei-
jouhou/chojou/ex/estimate.xls.

25,000,000 120%
100%
20,000,000
80%
In million Yen
15,000,000
60%
10,000,000
40%
5,000,000
20%
0 0%
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
Manufacturing Non-manufacturing
Manufacturing share of Big 50 turnover Non-manufacturing share of Big 50 turnover
Big 50 % of total private mining & manufacturing Big 50 % of total private non-manufacturing & mining
Sources: www.mlit.go.jp/toukeijouhou/chojou/ex/estimate.xls, and for Big 50 data www.

mlit.go.jp/toukeijouhou/chojou/ex/acho-ye.xls (both accessed 29 February 2012).
Figure 10.12 Big 50 share of total private investment
cent respectively during the period 20037. This suggests that parts of
the construction market are growing again. In such an environment the
propensity to collude may be facilitated by increasing cartel stability that
may be derived from the multimarket contacts of companies that compete
not only for public tenders but also for private construction contracts.49
3.4.4 Big 50 private sector expenditure

Before the burst of the bubble economy in 1990, the importance of the
private sector grew quickly and accounted for 78 per cent of the Big 50
construction firms total domestic turnover in 1990. The share fell rapidly
to 60 per cent in 1995 before it started to increase. In 2007 it accounted for
80 per cent of the Big 50s turnover.50
In terms of private sector demand, the largest 50 companies have
strongly been affected by the general sectoral decline in manufacturing
and non-manufacturing. This is depicted in Figure 10.12. The largest 50
construction companies have suffered from a rapid post-bubble decline.
49 On multimarket contacts see Bernheim and Whinston (1990). For a study
on highway construction see Gupta (2001).

50 Based on MLIT data, accessed 29 February 2012 at www.mlit.go.jp/toukei-
jouhou/chojou/ex/acho-ye.xls.

Compared to its peak in 1991, turnover of the Big 50 firms halved in 2002
and approached its 1986 level. Since its low point in 2002, turnover of the
Big 50 attributable to the private sector increased by 28 per cent during the
period 20027 (although this does still amount to a decline of 46 per cent
over the period 19902007).
The private non-manufacturing market share of the Big 50 declined
from around 83 per cent in 1991 to around 48 per cent in 1993. Despite a
further decline in the manufacturing market from about 10 trillion yen in
1996 to 7 trillion yen in 2002 (8 trillion yen in 2007), they have since been
able to maintain a stable market share of above 40 per cent. Similarly the
manufacturing market has declined drastically.
After the peak in private manufacturing demand that accrued to the
Big 50 in 1991, the turnover declined quickly only to recuperate slightly
in 199596. Since 1997, however, the Big 50s turnover in manufacturing
has halved and reached 1.1 trillion yen in 2002. In 2007 it regained in
strength and exceeded 2 trillion yen. Despite this significant decline, the
importance of manufacturing construction as a source of turnover has not
dramatically changed for the Big 50 companies. Manufacturing continued
to account for 14 and 20 per cent of their turnover, even reaching 21 per
cent in 2007.
The relative importance of the Big 50 companies in manufacturing and
non-manufacturing is depicted in Figure 10.12. It is shown that these com-
panies were responsible for an increasing share of the non-manufacturing
turnover of the whole industry and that after 1993 the level normalized and
ranged between 40 and 50 per cent. By contrast to the non-manufacturing
demand, the Big 50 have been far more successful in the area of mining
and manufacturing. Here, they have been able to increase their importance
from 60 per cent in 1985 to 100 per cent in 2000. Even though this is (in
part) attributable to the two different time series used,51 the qualitative
conclusion that the Big 50 have increased their market share in manufac-
turing seems well founded.
The above data suggests that the private sector market for large com-
panies has started to grow. It is particularly noticeable that, for a number
of years, the Big 50 companies have accounted for around 40 per cent of
the private non-manufacturing and mining markets in Japan and that they
appear to be controlling the entire Japanese mining and manufacturing
sector. In such an environment, repeated interactions between corpora-
tions may be expected, thus facilitating collusion. This qualifies, if not
51 www.mlit.go.jp/toukeijouhou/chojou/ex/estimate.xls, and www.mlit.go.jp/
toukeijouhou/chojou/ex/acho-ye.xls (both accessed 29 February 2012).

7,000 30,000
Suspensions of business transactions with
Cases
6,000
banks in the construction sector
25,000
Liabilities in 100 million Yen

5,000
20,000
4,000
15,000
3,000
10,000
2,000
1,000 5,000
0 0
*
01
02
03
04
05
06
07
08
96
97
98
99
00
01
02
20
20
20
20
20
20
20
20
19
19
19
19
20
20
20
Sources: Time series on the left hand side taken in 2003 from www.stat.go.jp/english/data/
geppou/#e, J5 in 2003, data originating from Teikoku Databank Limited. Data on the right
hand side is taken from www.stat.go.jp/data/getujidb/zuhyou/j05.xls, data originating from
Teikoku Databank (both accessed 28 August 2009). Data marked with a * represents a
break in the series.
Figure 10.13 Bank dealing suspensions
questions, the former finding of the public sector demand and its impact
on the possibility for firms to collude.
3.5 Debt Burden in the Industry
Presenting statistical evidence of the development of the debt burden in

the construction sector is complicated by a break in the available statistics.
Even though the data comes from the same source, the data presented in
the left and right columns of Figure 10.13 clearly suggests substantial dif-
ferences and must therefore be interpreted with care.
As presented in Figure 10.13 (left side), the number of cases of suspen-
sion of business transactions with banks has hovered around 6,000 since
2000. The liabilities related to the suspension of business transactions
with banks rapidly increased from 1.5 trillion yen in 2000 to 2.5 trillion
yen (about 20 billion) in 2002. This indicates that the number of firms
going into bankruptcy is increasing. Figure 10.13 (left side) suggests an
increasing number of cases of business suspensions in the construction
sector, albeit the numbers are much lower than indicated in Figure 10.13
(right side). It also bears mentioning that the total number of liabilities
reported by the industry peaked in 2002 and fell quickly until 2004. In
the last few years they have been rising more quickly than the number of
companies that have had to suspend business transactions. This would

60%
50%
40%
30%
20%
10%
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Inventory overinvestment Plant & equipment overinvestment
Stagnant sales High costs, no labour, profit decline
Proceeds collection Related other enterprise failures
Financings by accomodation bills High interest rates
Others
Sources: Time series until 2002 based on www.stat.go.jp/english/data/geppou/#e, J4

(accessed in 2003); thereafter www.stat.go.jp/data/getujidb/zuhyou/j04.xls (accessed 26
August 2009).
Figure 10.14 Causes of bankruptcies
again indicate that the number of companies in financial distress is

increasing.
The most important reason for suspending business transactions with
banks is stagnation in the level of sales, which alone accounted for 50 per
cent of all cases in 2008. Although it was already the single most impor-
tant reason for bankruptcy in 1996 (37 per cent), it increased until 2003
and then stabilized around its present level. After a temporary decline,
high costs (accounting for about 10 per cent of bankruptcies in 1996)
as a criterion for transaction suspension rose to 14 per cent in 2008. In
contrast to this, the significance of high interest rates as the cause of
bankruptcies reaching 18 per cent in 1999 declined to 5 per cent in 2008
(see Figure10.14).52
Even more pressing than the 2.5 trillion yen of open liabilities from bank
business suspensions is the high debt burden of large firms in the construc-
tion sector. While exact figures are not available, it is perhaps insightful to
52 Some SMEs are indeed credit-rationed and have to draw their finan-
cial resources from the far side of the bi-modal (15% and 2325% interest)
credit market: Professor Schaedes presentation at the Deutsches Institut fr
Japanstudien (German Institute for Japan Studies), Tokyo, 13 March 2003.

note that the debt burden of 10 of the biggest companies alone reached a
staggering 4.2 trillion yen (33 billion) in 2002.53 The burden was accumu-
lated during the speculative boom period of the early 1990s.54
Thus the debt burden of the industry represents a serious problem in
the construction sector, and, to the extent that predominantly large firms
were able to engage in speculation during the early 1990s, it is a more
pressing problem for the large companies.55 Financial consolidation is
urgently needed. Given the weak social security system and the strong
social importance of employment in Japan, politicians are unlikely to be
willing to let large firms slip into bankruptcy. The construction industry
will continue to shrink at a slow pace until demand equals supply. This
soft landing approach allows the industry to adjust to its changed envir-
onment in a more socially acceptable way.56 Given the overall situation
of the construction industry at the moment, it appears that this point is
approaching provided, of course, that public construction demand con-
tinues to be sizable.
One way to socialize the debt burden is to organize mergers in such a
way as to divide between healthy and unhealthy parts of business. The
Ministry of Land, Infrastructure, Transport and Tourism is seen to be
more willing to assist companies that concentrate on the core part of their
business.57 Consolidation as such may not contribute significantly to
industry adjustment unless production resources are scrapped.
A possible interpretation that can be given to the above treatment of
the debt burden in the industry is that high debt underlines the importance
of profitability and that it gives rise to both stabilizing and destabilizing
cartel effects. While it makes companies more interested in short-term
profits, they may at the same time shy away from breaking a cartel agree-
ment for fear that their future gains albeit limited may be lost. On the
other hand, since cartel enforcement through price wars is also costly for
betrayed cartel members, they may be more forgiving to renegades, which
renders cartel enforcement less credible. Given that there are both stabi-
lizing and destabilizing effects, it makes a detailed analysis of a concrete
situation necessary and makes an answer on an abstract level futile.
53 Data taken from Toyo Keizai (2002), 926, 100, 107, 111, 1289 and 148.
54 See Feldhoff (2002), 529.
55 See Choy (1998), 7.
56 Personal conversation with a business representative in the construction
industry.
57 Personal conversation with a business representative in the construction
industry.

3.6 Concluding Remarks
The Japanese construction sector still appears to be suffering from excess

supply. The market has largely adjusted to its environment but the gov-
ernments ability to apply Keynesian fiscal policy is approaching its limit.
A possible reduction in government investment in the future may require
further consolidation of the construction industry market that was about
to gain momentum when the recent financial crisis started. The 2011
nuclear disaster in Fukushima is projected to place an additional heavy
burden on the already stretched countrys finances that are projected to
exceed 219 per cent of GDP in 2012.58 The projected increase in public
construction has fallen after a strong 10.4 per cent increase in 2011 to 0.7
per cent in 2012.59
While, against this background, it is very difficult to predict the future
of the Japanese construction industry, it should be mentioned that there
are several issues that have been identified in the industry that affect its
propensity to collude. As mentioned above, since relevant construction
markets are locally confined, a detailed market analysis of particular
construction tenders is essential to determine if and which precautionary
measures should be employed by procuring entities. Yet it has been shown
above that the industry, albeit hardly struck by the demand shock, has
endured a prolonged period of consolidation and that there are a number
of factors that point not only towards more competition but also towards
the possibility of establishing more collusion.
Despite the many years of consolidation, there are still several firms
operating in the industry, and there is less reliance on subcontracting that
could be used to distribute cartel proceed. Furthermore, large companies
(the Big 50) that have been quite successful in winning public tenders are
currently less oriented towards public tenders and smaller companies are
more successful in winning public procurements. Given that larger firms
are also described as being more profitable, this could suggest that the
market for public tenders has become more competitive.
While industrial economics offers possibilities to explain the breakdown
of collusive agreements at times of reduced industry activity such as a
decline in the overall public construction demand it bears mentioning
that the private sector demand is growing. Cartels that would otherwise
break down may be enforced through retaliation in the private construc-
tion market. While the market share of the Big 50 companies in private
58 OECD (2011), 88.

59 RICE (2012), Table 1.

non-manufacturing and mining in Japan accounts for 40 per cent and may
thus be concentrated in regional markets, the situation appears to be worth
the attention of procurement entities particularly in the area of mining and
manufacturing. Here the Big 50 companies dominate the market.
Furthermore, the price level in the industry has for a few years been
starting to outpace inflation, which may be describing less of a declining
industry exposed to enhanced competition than an industry in which
market confidence is slowly building. This trend appears to have reverted
in 2009 and may still be repressed as a result of the impacts of the finan-
cial crisis and the nuclear disaster if, as predicted by the OECD, private
demand also remains sluggish.60
High or rising prices could also have resulted from collusion that is re-
established in the face of brightening industry prospects. Another factor
may limit cut-throat competition in an industry that based on the avail-
able data stands at the brink of a transition from a declining industry
to a slowly growing one. In the presence of the high debt burdens from
which large companies, in particular, in the industry are suffering, both
the willingness and financial potency to engage in fierce competition may
be limited. The willingness to fiercely compete with each other and to risk
a price war at a point in time when the profitability of a company has been
re-established may not be particularly attractive. Similarly, punishing
cartel renegades is not very credible since it is not only the renegades but
also cartel members who suffer from cartel sanctions. Last but not least,
competition may be limited if companies are credit-rationed and lack the
necessary funds to penetrate the sales areas of their competitors. But it
is not only the financial capacity but also the likely excess capacity and
the presumed ease with which incumbents can extend their business with
skilled labour and construction machinery that may serve as an effective
barrier to entry.
The above analysis cannot offer any clear answer to the question of
whether the Japanese construction industry is collusion prone or enforce-
ment prone. It indicates that there are signs of both more competitive
conduct as well as discouraging factors, which suggest that the propensity
of companies to collude may be rising again. A detailed analysis of the
particular market for a procurement tender is absolutely crucial for public
procurement entities to take precautionary measures.
60 OECD (2011), 88. It bears mentioning that the RICE (2012) report is more
optimistic, anticipating increased investment in both residential and commercial
private building.

4. CONCLUSION
This chapter has analysed bid rigging in the construction sector in Japan.
It is well known that firms in the sector have repeatedly been convicted for
rigging bids. The intense relations between politicians, bureaucrats and
industrialists, and the huge amounts of money concerned, have made it
subject to much JFTC attention.
The industry has suffered from a strong decline in demand and is slow
in adjusting to its new environment. Even though the industry is able to
pass on parts of the price pressure to its suppliers, profit ratios have fallen
to levels where firms engage at pricing below average costs.
While all firms are suffering from the decline in local government
procurement contracts, large contractors tend to receive a smaller share
of national public contracts. This is particularly noteworthy, since the
national government is making an effort to support the labour intensive
construction industry within the strict confines of its fiscal abilities.
Despite the economic distress of the industry, costs of construction
remain high by international standards. This is explained by the large
number of subcontractors, X-inefficiency and bid rigging. It is expected
that public procurement costs could be reduced significantly if bid rigging
is eradicated.
Bid rigging is supported by the bidding and business evaluation systems.
These systems do not only limit the number of competitors for a bidding
to 10, but also enable participants to determine which competitors are able
to qualify for a bid.
While trade associations have ceased active involvement in cartel
enforcement, they do provide a forum for the exchange of information and
the establishment of well-agreed codes of conduct. As individual firms,
they engage in lobbying and socializing activities to obtain relevant
information from civil servants and politicians regarding price ceilings and
in order to obtain contracts in exchange for generous kickbacks.
Cartel stability is aided by the highly transparent nature of construction
activities, the publication of posted bids and by collaboration with the
procuring entities.
Improving enforcement statistics show that the JFTC stringently applies
surcharges and criminal sanctions against bid rigging cartels and that offi-
cial trade association involvement in bid rigging conspiracies has declined.
The recent law against the elimination and prevention of involvement in
bid rigging allows the JFTC to demand procuring entities to investigate
the involvement of civil servants in bid rigging. As in the Iwamizawa bid
rigging case, public outrage will lead to action against those civil servants
who are engaged in cartels.

Since surcharges imposed on firms in economic distress may be paid by

instalments, the deterrent effect of having to disinvest in order to pay sur-
charges is reduced. Even though surcharges exceed profit levels, collusion
pays if the detection and enforcement of surcharge payment is low.
Even a strong antitrust authority that is able to effectively reduce the
benefits of collusion and to counter cartelization in the construction
sector and its supplying industries is unlikely to undermine the structural
rigidities of the sector. The JFTC is not equipped with the necessary tools
to overcome the rigidities represented by institutionalized factors such as
the bidding and business evaluation systems, or the amicable relationship
between industrialists, politicians and civil servants, or to reduce excess
capacity within the industry. Bid riggings will only be eradicated if politi-
cians are prepared to actively counter the involvement of civil servants
in cartels, alter the bidding and business evaluation systems so that they
do not support collusion, and open up the construction sector to market
forces.

11. Limits of economic theories and
concluding remarks
This book has been pointing towards varying degrees of under-deterrence
regarding bid rigging cartels in the EU, China and Japan. This suggests
that there are situations where it pays for companies to engage in carteliza-
tion. As a result, procuring entities must take extra precautions to avoid
becoming financially damaged. The costs to society caused by bid rigging
cartels can be very sizable and, in times of tight fiscal restraint and the
current debt crisis, finding ways to reduce wastage in limited government
resources is becoming ever more important.
In the earlier part of this book the issue of whether the legislation in
the three selected jurisdictions follows auction theoretic and industrial
economics insights was examined together with the ways in which these
economic insights may be used to prevent falling prey to bid rigging
conspiracies. A static industrial economic analysis, such as that pre-
sented for the construction industry in Japan, allows tendering authori-
ties to assess the susceptibility of an industry to engage in bid riggings.
Procuring entities can then take additional precautions in order not to
suffer financial loss. Auction theory, by contrast, cannot be used to
detect whether industries are likely to be able to form cartels, although it
can be used to prevent the creation of cartels during a particular tender
process. This chapter examines the limits of the applied economics
theories.
To be able to show the merits and demerits of economics in the context
of bid rigging conspiracies it is useful to examine its role in the various
stages of the legal enforcement process against cartels and to distinguish
between the actual objectives of the use of economic theory. Economics
can be used to detect if and how cartels have been operating (hence
an ex post view), or it can be used to prevent cartels forming (ex ante
perspective).
To effectively fight bid rigging conspiracies cartels must be detected,
prosecuted and penalized. At each of these stages economic theory can be
applied. Traditionally the strongest role of economics arises in the context
of penalization. Economics can be used to estimate the amount of loss that
has been incurred or the competitive market price that would have been
212

Limits of economic theories and concluding remarks 213
in the absence of a cartel.1 Economic theory is also used in the context of

setting (optimal) fines for cartel violations.
In the prosecution stage of a bid rigging conspiracy economics plays a
much weaker role. There are a number of empirical studies that were able
to present evidence to suggest the existence of bid rigging cartels.2
Most cartels appear to be detected through leniency policies or from
information received by the cartel authorities. Only a limited number of
cartels are detected through the application of economic theory.
Economic theory that proves the existence of bid rigging conspiracies
for example, in the context of court proceedings often takes the form of
empirical studies. Based on historic bidding information these studies can
examine if bidder behaviour is inconsistent with the profit maximization
behaviour of a competitive bidder.3 Such studies require a substantial
amount of data that may not be easily accessible or even constitute confi-
dential business information (such as information relating to production
costs). Studies that seek to identify suspicious bidding patterns, or changes
in bidding patterns, require data to be available over the relevant period
of time.4 If such data is based on public contracts alone, it may not be
able to offer a conclusive explanation about bidder behaviour since com-
panies may also respond to competitive pressures in their private market.
Empirical studies struggle to distinguish between collusion and tacit col-
lusion since, in economic terms, the difference is unimportant, given that
the behaviour they give rise to is very similar.5 Since law generally distin-
guishes between collusion and tacit collusion, a conclusive differentiation
between each situation would be most desirable. From the point of view of
preventing bid riggings it bears mentioning that they are ex post oriented
and do not offer early warnings to procuring entities.
Regarding the detection of bid rigging cartels, industrial economic
analysis can be used. Here the focus rests on identifying the determinants
of collusion. Studies in this tradition seek to identify market structures
that are conducive to cartelization. These studies require industry data
that presents information at an adequate level of detail. Such information
is not always easily obtainable for procuring entities. Statistical organi-
zations may offer useful information at a higher level of abstraction.
Complementary information might even be obtained from other procur-
ing entities and from past tenders. One problem in identifying structural
1 Harrington (2006).
2 Porter and Zona (1997).
3 Ibid.
4 Ishii (2008).
5 Harrington (2006).

determinants of bid rigging is that those determinants can only suggest

that it is relatively easier or more difficult to collude, but cannot establish
that a cartel actually exists. Given the remaining uncertainty, there may
thus be a tendency for procuring entities to identify too many industries as
being cartel prone (false positives) and thereby induce them to over-invest
in precautionary measures. Static industrial economic analysis neverthe-
less offers procuring entities an early warning so that adequate measures
may be taken.
In the case of the Japanese construction industry, for example, a number
of elements suggested that the construction sector is becoming more
competitive. Subcontracting that was used as a means to distribute cartel
proceeds is declining and smaller companies appear to win relatively more
procurement tenders. Furthermore, the declining size of the procurement
market points towards more competition rather than less. Yet bid rigging
cartels could be stabilized through retaliation in the growing private con-
struction market. Elements that point towards better prospects for collu-
sion are that price increases in the sector outpaced general inflation and
that the growth prospects for the sector were starting to improve. Barriers
to entry for new entrants to the industry are possibly still high because
there still appears to be excess capacity. The analysis, therefore, cannot
offer any clear answer as to whether the Japanese construction industry is
collusion prone. A detailed analysis of the particular construction market
is essential to decide if additional precautionary measures should be taken.
Economic tools other than static industrial economic analysis may be
used to examine the price and quantity data of a market. Depending on
the industry, such data may be more readily available. The tools used here
are comparable to those discussed above in the context of prosecuting bid
rigging cartels. Since price and quantity data is examined, investigators
would seek to identify particular bidding patterns or changes therein.
Evidence of collective price increases and the sudden emergence of a price
war would, for example, be taken as an indication that collusion was at
work. In contrast to industrial economic insights, the evidence of carteliza-
tion under such behavioural approaches would be more compelling since
they do not only suggest that collusion is possible but rather that it has
been at work. In this regard it can be viewed to be a backward-looking
tool.
The differentiation between an ex post view that examines if and how a
cartel has been operating and an ex ante view that seeks to offer an early
warning that cartels could be created in an industry stems from the desire
to prevent incurring damage from rigged tenders. While this differentia-
tion is relevant for procuring entities that newly engage a market, in many
cases this differentiation will be of only minor importance. Although con-

Limits of economic theories and concluding remarks 215
ceptually it appears true that there is a difference between having incurred

damage and seeking to avoid it, from an economic point of view both
approaches contain similar information: in both situations procurement
agencies know that they should take particular care during the tender
process.
The use of auction theory is not associated with any particular step in
the legal enforcement process against cartels. It can be used to render in-
auction cartel formation more difficult and help to undermine the stability
of existing cartels. Auction theory does not offer one size fits all solu-
tions. Auction mechanism design requires procuring entities to correctly
predict bidder characteristics in order to maximize its potential. Since
this requires a thorough knowledge of the expected bidders and auction
knowledge, tailor-made mechanism design solutions may only be appro-
priate in large and special tenders. In most cases standard auctions will be
used since tailor-made designs are too costly for both procuring entities
and bidders to employ. Auction theory may nevertheless be insightful
since it helps to avoid using mechanisms that are susceptible to bid rigging
cartels. If there is evidence that a cartel may operate at a particular tender,
auction theory suggests the use of appropriate means to undermine cartels.
With regard to both the EU and China the extent to which the public
procurement legislation is in line with auction theory has been exam-
ined, and the ways in which auction theory could be used to prevent bid
rigging conspiracies have been considered. Concrete insights that may
be employed by procurement entities to undermine cartel formation and
stability have also been examined.
With regard to the EU it has been shown that some aspects of the public
procurement rules facilitate the creation of bid rigging conspiracies. Areas
giving rise to concern are the use of subcontracting where more control
would be desirable for tendering authorities, the use of reserve prices and
the treatment of consortia. Most problems seem to arise in the context of
framework contracts and electronic auctions, where too much informa-
tion required to create a bid rigging cartel is available to participants.
Furthermore, in-auction signalling is not ruled out under the stipulations
on electronic auctions.
The EU procurement legislation seems to have no major problems
in the area of cartel stabilization. It is only in the context of framework
agreements and electronic auctions that cartel members may have the
opportunity for retaliation within the tender process.
In the case of China it has been found that the public procurement
laws facilitate the creation of bid rigging conspiracies and support cartel
stability. The areas giving rise to the strongest concern include disclosure
of information, the number of bidders and the procedures of opening bids.

In general it must be noted that the public procurement laws demon-

strate a high degree of transparency and non-discretionary procedures.
From a law and economics perspective such a choice seems to facilitate
cartelization but is, however, very much in line with administrative law
principles. In China, in particular, a very high degree of transparency has
been chosen that may be conducive to preventing corruption but may also
greatly facilitate bid rigging conspiracies. Here the Chinese legislator had
to make a trade-off between two undesirable practices, and has opted for
addressing corruption.
Despite the deficiencies in the above-mentioned economic approaches
to address bid rigging cartels, they still provide useful insights as to when
procuring entities should consider investing more resources into prevent-
ing cartels. These economic insights may also be used to undermine cartel
formation and destabilize existing cartels, and can thereby help to reduce
the number of bid rigging conspiracies. Until legislation is more in line
with economic theory and is aimed at effectively deterring the creation of
cartels, procuring entities will need to be alert to bid riggings.

Appendix 1
Appendix 1: Europe an overview of

public procurement law
1. INTRODUCTION
This chapter will give a general overview of the EU public procurement

framework and serves as background information to this book. It focuses
on EU law and not on the national regimes that exist in the EU Member
States.
Public procurement is generally understood as the entire process of
the acquisition of goods, services, works and other supplies by the public
service, which is usually executed by means of a contractual arrangement
after public competition. Public procurement legislation seeks to establish
rules and procedures in order to govern the way in which contracting
authorities purchase. Thus particular importance rests upon the purpose
and objective of such legislation.
The purpose of EU public procurement legislation has been described
by the Court as averting both the risk of preference being given to national
tenderers or applicants whenever a contract is awarded by the contract-
ing authorities, and the possibility that a body financed or controlled by
the state, regional or local authorities or other bodies governed by public
law may choose to be guided by other than economic considerations.1
Coherent with the Courts understanding that public procurement legisla-
tion is directed towards the furtherance of the internal market2 and the
1 C-18/01 Korhonen [2003] ECR I-5321, para. 52; C-380/98 University of
Cambridge [2000] ECR I-8035, para. 17; C-470/99 Universale-Bau and Others
[2002] ECR I-11617, para. 52; C-373/00 Truley [2003] ECR I-1931, para. 42;
C-237/99 Commission v France [2001] ECR I-939, para. 42; C-44/96 Mannesmann
[1998] ECR I-73, para. 33; C-360/96 Gemeente Arnhem and Gemeente Rheden v BFI
Holding BV [1998] ECR I-6821, paras 4243; C-283/00 Commission v Spain [2003]
ECR I11697, para. 92.
2 The CJEU states that Directives 92/50, 93/46 and 93/37, which taken as a
whole constitute the core of EU law on public contracts, are intended to attain
similar objectives in their respective fields and that there is no reason to give a
different interpretation to provisions which fall within the same field of EU law
and have substantially the same wording: see C-244/02 Kauppatalo Hansel Oy
217

fostering of competition,3 all relevant principles of the Union are cited

in the legal text. These include the principle of free movement of goods,
establishment and services and, derived from them, the principles of equal
treatment,4 non-discrimination5 mutual recognition, proportionality and
v Imatran Kaupunki [2003] ECR I-12139, paras 3435 and C-513/99 Concordia
Bus Finland [2002] ECR I-7213, paras 9091. Consequently former case law
falling under any of these directives is cited below. Case law concerning public
procurement and the internal market/freedoms: Joined Cases C-20/01 and C-28/01
Commission v Germany [2003] ECR I-3609, para. 60; C-26/03 Stadt Halle and
RPL Recyclingpark Lochau GmbH v Arbeitsgemeinschaft Thermische Restabfall
und Energieverwertungsanlage TREA Leuna [2005] ECR I-1, para. 46; Case 199/85
Commission v Italy [1987] ECR 1039, para. 12; C-176/98 Holst Italia [1999] ECR
I-8607, para. 23; C-389/92 Ballast Nedam Groep I [1994] ECR I-1289, para. 6;
C-19/00 SIAC Construction [2001] ECR I-7725, para 32; C-513/99 Concordia Bus
Finland, ibid., para. 32; C-92/00 Hospital Ingenieure Krankenhaustechnik Planungs
GmbH [2002] ECR I-5553, para. 43; C-380/98 University of Cambridge [2000] ECR
I-8035, para. 16; C-59/00 Bent Mousten Vestergaard [2001] ECR I-9505, para. 21;
C-373/00 Truley [2003] ECR I-1931, para. 41; C-470/99 Universale-Bau and Others
[2002] ECR I-11617, paras 51 and 89; C-237/99 Commission v France [2001] ECR
I-939, para. 41; Joined Cases C-285/99 and C-286/99 Impresa Lombardini SpA
Impresa Generale di Construzioni v ANAS [2001] ECR I-9233, para. 34; C-399/98
Ordine degli Architetti delle Province di Milano e Lodi and Others [2001] ECR
I-5409, para. 52.
3 C-214/00 Commission v Spain [2003] ECR I-4667, para. 53; Joined Cases
C-21/03 and C-34/03 Fabricom SA v Belgian State [2005] ECR I-1559, para.
26; C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 81; Joined Cases
C-285/99 and C-286/99 Impresa Lombardini SpA Impresa Generale di Construzioni
v ANAS [2001] ECR I-9233, para. 35; C-27/98 Fracasso and Leitschutz [1999] ECR
I-5697, para. 26; C-470/99 Universale-Bau and Others [2002] ECR I-11617, para.
89; C-247/02 Sintesi SpA [2004] ECR I-9215, para. 35; C-243/89 Commission
v Denmark [1993] ECR I-3353, para. 33; C-399/98 Ordine degli Architetti delle
Province di Milano e Lodi and Others [2001] ECR I-5409, paras 52 and 75; C-31/87
Beentjes [1988] ECR I-4635, para. 21.
4 C-19/00 SIAC Construction [2001] ECR I-7725, paras 3334; C-243/89
Commission v Denmark [1993] ECR I-3353, para. 33; C-87/94 Commission v

Belgium [1996] ECR I-2043, para. 54; T-183/00 Strabag Benelux v Council [2003]
ECR I-135, para. 39; Joined Cases C-21/03 and C-34/03 Fabricom SA v Belgian
State [2005] ECR I-1559, paras 26 and 29; C-513/99 Concordia Bus Finland [2002]
ECR I-7213, para. 81; C-458/03 Parking Brixen GmbH [2005] ECR I-8585, para.
48; C-470/99 Universale-Bau and Others [2002] ECR I-11617, paras 91 and 93;
C-315/01 GAT [2003] ECR I-6351, para. 73; C-448/01 EVN and Wienstrom [2003]
ECR I-14527, para. 47; C-92/00 Hospital Ingenieure Krankenhaustechnik Planungs
GmbH [2002] ECR I-5553, para. 45; C-331/04 ATI EAC and Others [2005] ECR
I-10109, para. 22.
5 C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 63; Joined
Cases C-20/01 and C-28/01 Commission v Germany [2003] ECR I-3609, para. 62;
C-275/98 Unitron Scandinavia [1999] ECR I-8291, para. 29; C-264/03 Commission

Appendix 1 219
transparency.6 Jurisprudence developed by the CJEU plays a central role

in limiting the liberty of contracting authorities to address public concerns
through the design of award criteria that violate the above principles.7
While the above holds true for public works contracts, public supply con-
tracts and public service contracts,8 the legislator has attributed a special
position to economic entities operating in the water, energy, transport and
postal service sectors.9 In light of the closed nature of the markets in these
sectors and the frequent existence of special and exclusive rights, the legis-
lator refers only to the principles of equal treatment, non-discrimination,
mutual recognition, proportionality and transparency.10
Well-designed public procurement procedures are important through-
out the EU. Even though the importance of public procurement differs
significantly across Member States, according to Commission estimates
it accounts for approximately 16 per cent of the Unions GDP.11 In times
of severe budgetary austerity cost-effective procurement is ever more
important. According to the same Commission study, prices paid by
procuring entities fell by 30 per cent12 following the introduction of public
v France [2005] ECR I-8831, para. 32; C-324/98 Telaustria and Telefonadress
[2000] ECR I-10745, paras 6061; C-92/00 Hospital Ingenieure Krankenhaustechnik
Planungs GmbH [2002] ECR I-5553, para. 47; C-59/00 Bent Mousten Vestergaard
[2001] ECR I-9505, para. 20; C-243/89 Commission v Denmark [1993] ECR I-3353,
paras 33, 3740, 45; C-225/98 Commission v France [2000] ECR I-7445, para. 50;
C-31/87 Beentjes [1988] ECR I-4635, paras 2930; C-458/03 Parking Brixen GmbH
[2005] ECR I-8585, para. 48.
6 See Directive 2004/18/EC, recital 2 and Arts 2 and 3. See C-324/98 Telaustria
and Telefonadress [2000] ECR I-10745, paras 6062; C-87/94 Commission v

Belgium [1996] ECR I-2043, para. 54. For case law addressing preferential treat-
ment of economic operators by contracting authorities see Commission v Belgium,
ibid., para. 56; T-19/95 Adia Interim SA v Commission [1996] ECR I-321, paras 42
and 47. More specifically for the principle of transparency see C-275/98 Unitron
Scandinavia [1999] ECR I-8291, para. 31; C-214/00 Commission v Spain [2003]
ECR I-4667, para. 53; C-19/00 SIAC Construction [2001] ECR I-7725, para 41;
C-92/00 Hospital Ingenieure Krankenhaustechnik Planungs GmbH [2002] ECR
I-5553, para. 45; Telaustria and Telefonadress, ibid., paras 6162; C-421/01
Traunfellner [2003] ECR I-11941, para. 29; C-458/03 Parking Brixen GmbH [2005]
ECR I-8585, para. 49; C-470/99 Universale-Bau and Others [2002] ECR I-11617,
para. 92.
11 European Commission (2004), 4. Data for all EU Member States ranges
from 1995 to 2002 and is robustly above 16%.

12 European Commission (2004), 1516.

procurement directives,13 which led to both an increase in transparency

and effective cross-border competition. Issues identified that contribute
to a further reduction in procurement prices are transaction costs and, to
a lesser extent, social clauses.14 Environmental clauses were not regarded
as problematic.15
Based on the public procurement Green Paper16 published in 1996
and its public procurement report in 1998,17 the European Commission
proposed amendments to simplify, clarify and combine the existing legis-
lation and modernize the existing public procurement Directives.18 These
related to: (i) electronic purchasing, (ii) extending the applicability of the
negotiation procedure to particularly complex contracts, (iii) framework
agreements, (iv) clarification of technical specifications, (v) strengthen-
ing of award and selection criteria, (vi) simplification of thresholds, and
(vii) the introduction of a common procurement vocabulary,19 and are
reflected in the new Directives20 that had to be implemented until 31
January 2006.21
It is the object of this chapter to present a general introduction to
the field of EU public procurement. It starts with a concise and general
introduction to the field of law (Section 2). For simplicity and to foster
a better understanding of this complex field of law, the remainder of
the chapter focuses predominantly on the main public procurement
Directive, Directive 2004/18/EC, and allows one to follow the logic of
a procurement procedure from determining the applicable law to the
criteria employed in awarding the contract. The applicability of the
Directive is first discussed (Section 3) and issues raised include the per-
sonal scope, thresholds and material scope. The substantive provisions of
the Directive are addressed in Section 4. Here procurement procedures,
rules on advertising, transparency of tenders and eligibility requirements
for candidates are discussed. Last but not least, the award of a contract
is considered. This passage touches upon awarding criteria that may be
13 Public procurement legislation in force in 2002 included Council Directive
89/665, Council Directive 92/13/EEC, Council Directive 92/50/EEC, Council

Directive 93/36/EEC, Council Directive 93/37/EEC, Council Directive 93/38/
EEC.
14 European Commission (2004), 21 ff. See also COWI (2003a) and (2003b).
15 European Commission (2004), 21. See also ICLEI (2003).
16 European Commission (1996).
19 Ibid., 416.
20 Directive 2004/17/EC and 2004/18/EC.
21 Directive 2004/17/EC, Art. 71(1) and Directive 2004/18/EC, Art. 80(1).

Appendix 1 221
employed and upon rules governing the conduct of contracting authori-

ties in the presence of abnormally low tenders and the need to discontinue
a public procurement procedure. Section 5 presents some general provi-
sions of the Directive. A brief outlook on the ongoing reform concludes
the chapter (Section 6).
2. THE FIELD OF LAW

The core laws on public procurement in the European Union are Directives
2004/18/EC and 2004/17/EC. While the former coordinates procedures for
the award of public works contracts, public supply contracts and public
service contracts, the latter has a strong sectorial focus and coordinates
the procurement procedures of entities operating in the water, energy,
transport and postal service sectors.
In addition to these two Directives there are seven other relevant
legal acts. Two of these establish standard forms for the publication
of notices (Commission Implementing Regulation (EC) No. 842/2011
and Commission Directive 2001/78/EC); one amends features con-
cerning publication (Commission Directive 2005/51/EC) and another
presents rules of procedure for establishing whether a given (sectorial)
activity is directly exposed to competition (Decision 2005/15/EC).
Commission Regulation (EC) No. 2151/200322 deals with the Common
Procurement Vocabulary, while two Council Directives address legal
remedies (Council Directive 92/13/EEC and Council Directive 89/665/
EEC).
Most existing case law is based upon the former public procurement
Directives23 that ceased to be applicable on 1 January 2006. To the extent
that the wording between the former and the present legislation did not
change significantly, former case law can successfully be drawn upon in
order to describe the interpretation that the Court may give to the wording
of the new Directives.
22 Amending Regulation (EC) No. 2195/2002 of the European Parliament and

of the Council.
23 Council Directive 93/36/EEC of 14 June 1993 coordinating procedures for
the award of public supply contracts; Council Directive 93/37/EEC of 14 June

1993 coordinating procedures for the award of public works contracts; Council
Directive 93/38/EEC of 14 June 1993 coordinating procurement procedures of
entities operating in the water, energy, transport and telecommunications sectors,
and Council Directive 92/50/EEC of 18 June 1992 relating to the coordination of
procedures for the award of public service contracts.

3. APPLICABILITY
In order to determine whether the European public procurement legisla-
tion is applicable, a number of elements have to be fulfilled. First, the
procuring entity must be a contracting authority within the meaning of
Directive 2004/17/EC or Directive 2004/18/EC; second, the envisaged con-
tract must exceed the relevant threshold level. Besides these two require-
ments the legislation may be employed only if the subject matter of the
procurement procedure falls within the material scope of the directives.
Each requirement is discussed in turn.
3.1 Personal Scope
The scope of application of Directive 2004/18/EC is to be seen in conjunc-

tion with the sectorial Directive 2004/17/EC because the subject matter
of the tender determines the applicable law. The material scope takes
precedence over the personal scope.24 Both Directives use the same defini-
tion of contracting authority,25 as listed in Annex I of the Directives,26
24 C-324/98 Telaustria and Telefonadress [2000] ECR I-10745, para. 33.

25 The term contracting authority must be interpreted in functional terms,
without any distinction drawn by reference to the legal form of the provisions
setting up the entity and specifying the needs which it is to meet. See C-360/96
Gemeente Arnhem and Gemeente Rheden v BFI Holding BV [1998] ECR I-6821,
para. 62; C-306/97 Connemara Machine Turf Co. Ltd v Coillte Teoranta [1998]
ECR I-8761, para. 31; C-353/96 Commission v Ireland [1998] ECR I-8565, para. 36;
C-214/00 Commission v Spain [2003] ECR I-4667, para. 53; C-470/99 Universale-
Bau and Others [2002] ECR I-11617, para. 53; C-31/87 Beentjes [1988] ECR I-4635,
para. 11; C-84/03 Commission v Spain (nyr), para. 27. The approach that contract-
ing authorities are to be interpreted in functional terms is also extended to bodies
governed by public law: see C-237/99 Commission v France [2001] ECR I-939, paras
4143. An entitys private law status does not constitute a criterion for precluding
it from being classified as a contracting authority. On this point see C-214/00
Commission v Spain [2003] ECR I-4667, paras 5455; C-283/00 Commission v Spain
[2003] ECR I-11697, para. 74; C-360/96 Gemeente Arnhem and Gemeente Rheden v
BFI Holding BV [1998] ECR I-6821, paras 6162; C-237/99 Commission v France
[2001] ECR I-939, paras 50 and 60; C-44/96 Mannesmann [1998] ECR I-73, paras 6
and 29; C-84/03 Commission v Spain, ibid., para. 28. Thus commercial companies
under public control are not excluded from the ratione personae of the directives:
see C-214/00 Commission v Spain, ibid., paras 5560, particularly 57.
26 Case law of the Court of Justice of the EU is reflected in Directives
2004/17/EC and 2004/18/EC, which state that the listings of contracting entities
is non-exhaustive. See Directive 2004/17/EC, Art. 8 and Directive 2004/18/EC,
Art.1(9)(c). For case law see C-283/00 Commission v Spain [2003], ECR I-11697,
para. 77; C-373/00 Truley [2003] ECR I-1931, para. 44.

Appendix 1 223
extending it to the state27 and all bodies governed by public law and asso-
ciations in which such a body is a member.28 In order for a body to fall
within the broad29 concept of being governed by public law, it must meet
three cumulative conditions:30 the body (i) is established to execute non-
commercial tasks in the public interest, (ii) has legal personality, and (iii)is
dependent upon public authorities.31
The first condition, that a body is established to execute non-commercial
tasks in the public interest, can be reduced to a number of elements which
require further elaboration.
It should first be noted that needs in the general interest is an autono-
mous concept of EU law32 and appears to be interpreted broadly.33 Needs
in the general interest are defined as needs which are satisfied otherwise
than by the availability of goods and services in the marketplace and
which, for reasons associated with the general interest, the state chooses to
provide itself or over which it wishes to retain a decisive influence.34 The
27 The state encompasses all bodies which exercise legislative executive and
judicial powers and should be interpreted in functional terms; it also includes legis-
lative bodies: see C-323/96 Commission v Belgium [1998] ECR I-5063, paras 2629;
C-31/87 Beentjes [1988] ECR I-4635, para. 11.
28 See Directive 2004/17/EC, Art. 2(1)(a) and Directive 2004/18/EC, Art.
1(9). Nevertheless, the fact that one of the undertakings of a group or concern is
a body governed by public law is not sufficient for all of them to be regarded as
contracting authorities: see C-360/96 Gemeente Arnhem and Gemeente Rheden v
BFI Holding BV [1998] ECR I-6821, para. 57, and C-44/96 Mannesmann [1998]
ECR I-73, para. 39.
29 C-373/00 Truley [2003] ECR I-1931, para. 43; C-214/00 Commission v Spain
[2003] ECR I-4667, para. 53; C-283/00 Commission v Spain [2003] ECR I-11697,
para. 73. For its limitation see C-44/96 Mannesmann [1998] ECR I-73, para. 39.
30 C-44/96 Mannesmann [1998] ECR I-73, paras 2021 and 38; C-237/99
Commission v France [2001] ECR I-939, para. 40; Joined Cases C-223/99 and
C-260/99 Agor and Excelsior [2001] ECR I-3605, para. 26; C-214/00 Commission
v Spain [2003] ECR I-4667, para. 52; C-283/00 Commission v Spain [2003] ECR
I-11697, para. 69; C-84/03 Commission v Spain (nyr), para. 27; C-18/01 Korhonen
[2003] ECR I-5321, para. 32; C-360/96 Gemeente Arnhem and Gemeente Rheden
v BFI Holding BV [1998] ECR I-6821, paras 2829; C-373/00 Truley [2003] ECR
I-1931, para. 34.
31 See Directive 2004/17/EC, Art. 2(1)(a) and Directive 2004/18/EC, Art. 1(9).
32 C-373/00 Truley [2003] ECR I-1931, paras 36, 40 and 45; C-283/00
Commission v Spain [2003] ECR I-11697, para. 79.

33 See C-18/01 Korhonen [2003] ECR I-5321, para. 45.
34 C-360/96 Gemeente Arnhem and Gemeente Rheden v BFI Holding BV
[1998] ECR I-6821, paras 5052; Joined Cases C-223/99 and C/260/99 Agor and
Excelsior [2001] ECR I-3605, paras 33 and 37; C-373/00 Truley [2003] ECR I-1931,
para. 50; C-18/01 Korhonen [2003] ECR I-5321, para. 47; C-283/00 Commission v
Spain, [2003] ECR I-11697, para. 80.

Court has also held that needs in the general interest devoid of an indus-
trial or commercial character must be appraised objectively, irrespective of
the legal form in which these needs are phrased.35
Second, in contrast to the wording of the Directive, the Court has held
that a body does not have to be established for the purpose of satisfying
needs in general interest but may incorporate such tasks into its sphere of
activities.36
Concerning the absence of an industrial or commercial character, the
Court has held that a body operating in normal market conditions, aiming
to make profits and bearing the losses associated with the exercise of its
activities, is unlikely to fulfil this criterion.37 Yet it has also held that a con-
tracting authority may pursue additional38 activities other than its specific
task of meeting needs in the general interest without having an industrial
or commercial character.39 While the existence of significant competition
in the market is indicative of the absence of a need in the general interest
devoid of an industrial or commercial character, it does imply that needs
which are or can be satisfied by private undertakings as well are automati-
cally devoid of such properties.40
In contrast to the preceding condition, the second one, legal personality,
appears to be less flexible, and may even be described as a question of fact.
If a procuring entity is devoid of legal personality, it is examined to see if
it is in substance subject to the decision-making power of another body.41
35 C-360/96 Gemeente Arnhem and Gemeente Rheden v BFI Holding BV [1998]

ECR I-6821, para. 63; C-470/99 Universale-Bau and Others [2002] ECR I-11617,
para. 60.
36 C-470/99 Universale-Bau and Others [2002] ECR I-11617, paras 46 and 63.
37 C-18/01 Korhonen [2003] ECR I-5321, paras 4951; C-283/00 Commission v
Spain [2003] ECR I-11697, para. 82; Joined Cases C-223/99 and C/260/99 Agor
and Excelsior [2001] ECR I-3605, paras 40 and 43.
ECR I-6821, para. 55.

39 C-44/96 Mannesmann [1998] ECR I-73, paras 25, 26 and 31. See also Joined
Cases C-223/99 and C/260/99 Agor and Excelsior [2001] ECR I-3605, paras 33
and 43; C-373/00 Truley [2003] ECR I-1931, para. 56; C-18/01 Korhonen [2003]
ECR I-5321, para. 58; C-360/96 Gemeente Arnhem and Gemeente Rheden v BFI
Holding BV [1998] ECR I-6821, paras 5556.
ECR I-6821, paras 49 and 53; Joined Cases C-223/99 and C/260/99 Agor and
Excelsior [2001] ECR I-3605, para. 38; C-373/00 Truley [2003] ECR I-1931, para.
66; C-283/00 Commission v Spain [2003] ECR I-11697, para. 81. For the role
of competition see Truley, ibid., paras 5961; Gemeente Arnhem and Gemeente
Rheden v BFI Holding BV, ibid., paras 44, 4849.
41 See C-272/91 Commission v Italy [1994] ECR I-1409, para. 28.

Appendix 1 225
The third element considered in order to establish that a body falls

within the definition of a body governed by public law is its dependency42
on the state or other bodies governed by public law. Here financing, super-
vision43 and appointment are the criteria that are examined44 in order to
determine if the state or bodies governed by public law have the capacity
to control45 the economic activity.46 It should be noted, however, that
fulfilling one of these criteria is sufficient.47
With regard to financing procurements the Court has held that the
decision as to whether an entity is a contracting authority should be
made at the beginning of each financial year in which the procurement
procedure commences if necessary on the basis of provisional data and
be regarded as such for the whole duration of the resulting contract.48 In
order to determine if the entity is financed for the most part (more than
50 per cent)49 by the state or bodies governed by public law, account must
be taken of all50 its income, including that resulting from commercial
activity.51
With regard to supervision, the Court has held that the mere review
of management is insufficient.52 It suffices, however, to supervise the
annual accounts and the entitys conduct under accounting, regulatory,
42 C-380/98 University of Cambridge [2000] ECR I-8035, para. 20; C-237/99

Commission v France [2001] ECR I-939, paras 44 and 48; C-373/00 Truley [2003]
ECR I-1931, para. 68.
43 C-237/99 Commission v France [2001] ECR I-939, paras 4849; C-373/00
Truley [2003] ECR I-1931, para. 69.

44 See Directive 2004/17/EC, Art. 2(1)(a) and Directive 2004/18/EC, Art. 1(9)
(c).
45 C-237/99 Commission v France [2001] ECR I-939, para. 48, speaks of ability
to influence rather than control.

46 See C-353/96 Commission v Ireland [1998] ECR I-8565, para. 38. More pre-
cisely, the Court speaks of the Ministers power to give instructions.

47 See the wording of Directive 2004/17/EC, Art. 2(1)(a) and Directive 2004/18/
EC, Art.1(9)(c), but also C-237/99 Commission v France [2001] ECR I-939, para.
60.
48 C-380/98 University of Cambridge [2000] ECR I-8035, para. 44.
49 Ibid., para. 30.
50 Payments made in the context of contracts for the provision of services such
as research, consultancy and organizing conferences are held to be commercial,

while making awards and grants paid for by public law bodies for the support of
research work and student grants paid by local education authorities to named
students are non-commercial. No differentiation is made between payments made
to the entity as such, or one of its members in his capacity of service provider: see
C-380/98 University of Cambridge [2000] ECR I-8035, paras 22 and 26.
51 Ibid., para. 36.
52 C-373/00 Truley [2003] ECR I-1931, para. 74.

economic, efficiency and expediency considerations where authorities are

authorized to inspect premises and report to an authority holding all the
shares of that entity.53 On a more general note, the Court does not require
that state control extends to the actual awarding of contracts; indirect
control is deemed to be sufficient.54
3.2 Thresholds
After elaborating upon the definition of contracting authority for the

purpose of the applicability of European public procurement law, the
second element to be considered involves the existing thresholds. Entities
wishing to procure goods or services and who come within the personal
scope of the Directive have only to abide by it including its provisions
on international treaties and confidentiality55 in respect of contracts that
meet particular thresholds.
Directive 2004/18/EC applies to public contracts56 procured by central
government authorities (listed in Annex IV) and particular products con-
tracted by authorities operating in the field of defence (listed in AnnexV)
of at least 162,000.57 As with all cited thresholds, the quoted figures relate
to values net of value added tax. If such an entity is not listed in Annex
IV the threshold increases to 249,000.58 This threshold applies also for
those entities listed in Annex IV, operate in the defence sector but procure
products not listed in Annex V, as well as any entity that procures research
and development services59 or telecommunications services.60 Given the
normally large amount of expenditure, public work contracts have a
53 Ibid., para. 74.

54 C-353/96 Commission v Ireland [1998] ECR I-8565, para. 39.
55 See Directive 2004/18/EC, Arts 5 and 6.
56 The involvement of public resources is not decisive to determine that a
contract is a public one: see C-126/03 Commission v Germany [2004] ECR I-11209,
para. 20.
57 See Directive 2004/18/EC, Art. 7(a). Art. 7 applies subject to specific
situations and exclusions listed in Arts 1018. Specific situations include defence
procurement and public contracts and framework agreements awarded by central
purchasing bodies. Excluded contracts fall within the area of water, energy, trans-
port and postal services, telecommunications, (national) security, international
rules, service concessions and exclusive rights. Further specific exclusions relate to
the acquisition and rental of immovable property, broadcasting, arbitration and
conciliation services, financial instruments, employment contracts and research
and development contracts.
58 See Directive 2004/18/EC, Art. 7(b).
59 As listed in Directive 2004/18/EC, Annex II A, Category 8.
60 As listed in Directive 2004/18/EC, Annex II A, Category 5.

Appendix 1 227
threshold of 6,242,000.61 The same threshold applies if public building

projects and contracts involving civil engineering activities are subsidized
for the most part by contracting authorities.62 If a service contract origi-
nates in such a project, a threshold of 249,000 applies.63
Contracts falling within the scope of the sectorial procurement Directive
2004/17/EC have different thresholds for supply and service contracts,
amounting to 499,000, while they have the same threshold for public
works (6,242,000).64
For both Directives, specific rules apply governing the calculation of
the estimated contract value, as well as the value of framework agreements
and dynamic purchasing systems.65 They forbid tendering authorities to
circumvent the Directives66 and establish a clear and coherent methodol-
ogy for calculation.
3.3 Material Scope
Besides the personal scope and the threshold requirements, the field of
application is delineated by issues relating more to the material scope
of the procurement project. This section as does the remainder of the
chapter focuses primarily on Directive 2004/18/EC.
Directive 2004/18/EC applies to defence procurement only insofar as it
does not prejudice Article 346 TFEU, and to a very limited extent to public
contracts in the field of telecommunications,67 and to water, energy, trans-
port and postal services only to the extent that they do not come within
the Sectorial Directive 2004/17/EC.68 Directive 2004/18/EC does not apply
61 See Directive 2004/18/EC, Art. 7(c).

62 See Directive 2004/18/EC, Art. 8(a).
63 See Directive 2004/18/EC, Art. 8(b).
64 See Directive 2004/17/EC, Art. 16(a)(b). These obligations are subject to
exclusions listed in Arts 1926 and Art. 30. General exclusions relate to resale
or lease to third parties, contracts not falling within the ambit of Arts 37,
(national) security, international rules and joint ventures. Other exclusions relate
to service contracts, certain contracting entities and to entities directly exposed to
competition.
65 See Directive 2004/17/EC, Art. 17 and Directive 2004/18/EC, Art. 9.
66 See Directive 2004/17/EC, Art. 17(2) and Directive 2004/18/EC, Art. 9(3). In
order to determine if a tender has been artificially split with the effect of circum-
venting the Directive, each tender for a contract must be assessed according to its
context and its particular characteristics: see C-16/98 Commission v France [2000]
ECR I-8315, paras 6166.
68 See Directive 2004/18/EC, Arts 10 and 12.

in the case of secret contracts and special security measures,69 contracts

awarded pursuant to international rules,70 service concessions71 and
contracts awarded on the basis of exclusive rights.72 Specific exclusions
relate to the acquisition and rental of immovable property, broadcasting,
arbitration and conciliation services, financial instruments, employment
contracts and research and development contracts,73 and to especially
reserved contracts for sheltered employment programmes.74
4. SUBSTANTIVE RULES
While the previous section is relevant for the applicability of the Directive
to the contract at hand, the next issue is the determination of the relevant
substantive rules, although it should be noted that specific articles apply
to service contracts,75 public work concessions76 and for goods being con-
tracted through design contests.77 For all other types of contract the rules
described below apply. This section describes the various elements and
stages of a procurement procedure. The first part presents the procedures
and purchasing formats that may be employed by contracting authori-
ties. Thereafter the rules on advertising and transparency of procurement
projects are reviewed. Subsequently the authoritys right to examine
the eligibility of candidates to participate in a tendering procedure is
considered before the actual award of the contract is reviewed. Here, in
particular, rules governing abnormally low tenders and the withdrawal of
tendering procedures are examined.
4.1 Public Procurement Procedures and Purchasing Formats
National procurement procedures must be adjusted to Directive 2004/18/

EC. This section, therefore, describes the procurement procedures and
purchasing formats contained in the Directive. These include open and
69 Directive 2004/18/EC, Art. 14. See C-252/01 Commission v Belgium (2003,
nyr), paras 30 and 3637.

75 See Directive 2004/18/EC, Arts 2022.

Appendix 1 229
restricted procedures, competitive dialogues, design contests, negotiated

procedures with and without publication of a contract notice and, last but
not least, the Directive allows the design of a particular award procedure
for subsidized housing schemes. Purchasing formats include framework
agreements, dynamic purchasing systems and electronic auctions. Each is
discussed in turn.
The two standard forms of procurement procedures are the open and
the restricted procedure. In the former any interested economic opera-
tor may submit a tender while, in the latter, any economic operator may
seek to participate but only those invited by the contracting authority are
allowed to submit a tender.78 At least five economic operators must form
part of a restricted procedure79 and, in any event, the number of candi-
dates invited must be sufficient to ensure genuine competition.80
In a particularly complex case defined as a situation in which the
contracting authority is objectively unable to define the technical means or
to specify the legal or financial makeup of the project81 the contracting
authority is allowed to employ the competitive dialogue. According to this
procedure any economic operator may ask to participate and the contract-
ing authority engages in a dialogue with admitted candidates to develop
suitable alternatives to meet the requirements for particularly complex
contracts in order to select the most economically advantageous tender.82
Here the minimum number of candidates is three but, in any event, the
number of candidates must be sufficient to ensure genuine competition.83
So-called design contests enable contracting authorities to acquire,
through a competitive process, a plan or design of works relating to elem-
ents such as data processing, engineering or architectural work.84 Design
contests are also used in the field of town and country planning.
The contracting authority may employ the negotiated procedure in
the event of irregular tenders or when the submission of tenders is unac-
ceptable under national law,85 the impossibility of determining the prior
overall pricing,86 or difficulties in designing service contracts,87 non-profit
78 See Directive 2004/18/EC, Art. 28.

79 C-225/98 Commission v France [2000] ECR I-7445, para. 61, and Directive
2004/18/EC, Art. 44(3).
80 Directive 2004/18/EC, Art. 44(3).
81 See Directive 2004/18/EC, Art. 1(11)(c).
82 See Directive 2004/18/EC, Arts 1(11)(c) and 29.
83 Directive 2004/18/EC, Art. 44(3).
84 Directive 2004/18/EC, Art. 1(11)(e).
85 See Directive 2004/18/EC, Art. 30(1)(a).
86 See Directive 2004/18/EC, Art. 30(1)(b).

oriented public works contracts directed at research, testing and devel-

opment.88 Following publication of the contract notice, the authority
consults the economic operators of its choice and negotiates the terms of
the contact with one or more parties. In the negotiated procedure with
publication of a contract notice the minimum number of candidates is
three, while ensuring that the number is sufficient to safeguard genuine
competition.89
Contracting authorities may employ the negotiated procedure without
publication of a contract notice if (i) the open or the restricted procedure
has failed and the initial contract criteria have not been sufficiently
altered;90 (ii) because of technical, artistic or the exclusivity of rights, the
contract can only be awarded to a particular operator;91 or (iii) because of
extreme urgency brought about by unforeseeable events unrelated to the
contracting authority.92 Apart from these general requirements further
criteria, listed in Article 31 of the Directive, apply to public supply, service
and works contracts. The existing case law focuses predominantly on the
interpretation of the reasons when the contract may only be carried out by
a particular operator and the existence of extreme urgency.
It is well-established case law that the latter two derogations are to
be interpreted strictly93 and that the burden of proof rests on the party
seeking to rely upon them.94 The Court has held that in order to rely upon
88 See Directive 2004/18/EC, Art. 30(1)(d).

89 Directive 2004/18/EC, Art. 44(3).
90 See Directive 2004/18/EC, Art. 31(1)(a).
91 See Directive 2004/18/EC, Art. 31(1)(b).
93 See C-84/03 Commission v Spain (nyr), para. 48; C-318/94 Commission v
Germany [1996] ECR I-1949, para. 13; C-126/03 Commission v Germany [2004]
ECR I-11197, para. 23; C-385/02 Commission v Italy [2004]ECR I-8121, para.
19; C-328/92 Commission v Spain [1994] ECR I-1569, para. 15; C-324/93 Evans
Medical [1995] ECR I-563, para. 48; C-57/94 Commission v Italy [1995] ECR
I-1249, para. 23; Case 199/85 Commission v Italy [1987] ECR 1039, para. 14; Joined
Cases C-20/01 and 28/01 Commission v Germany [2003] ECR I-3609, para. 58;
C-26/03 Stadt Halle and RPL Recyclingpark Lochau GmbH v Arbeitsgemeinschaft
Thermische Restabfall und Energieverwertungsanlage TREA Leuna [2005] ECR
I-1, para. 46; C-394/02 Commission v Greece [2005] ECR I-4713, para. 33; C-71/92
Commission v Spain [1993] ECR I-5923, para. 36.
94 C-318/94 Commission v Germany [1996] ECR I-1949, para. 13; C-126/03
Commission v Germany [2004] ECR I-11197, para. 23; C-385/02 Commission v

Italy [2004] ECR I-8121, para. 19; C-328/92 Commission v Spain [1994] ECR
I-1569, para. 16; C-57/94 Commission v Italy [1995] ECR I-1249, para. 23; Case
199/85 Commission v Italy [1987] ECR 1039, para. 14; Joined Cases C-20/01 and
28/01 Commission v Germany [2003] ECR I-3609, para. 58; C-394/02 Commission v
Greece [2005] ECR I-4713, para. 33.

Appendix 1 231
either derogation, all criteria laid down must be fulfilled cumulatively.95

The Court did not entertain, nor was convinced by, the evidence pre-
sented that only a particular operator could be relied upon with regard to
pharmaceutical products and specialties that were protected by exclusive
rights,96 the medical substance diamorphine,97 shortage of space and the
close structural connection of foundations of a construction project,98
the proximity of a waste disposal facility,99 and a conveyor belt between
a power plant and a mine.100 Similarly, the Court did not entertain, nor
was convinced by, evidence presented that a situation of extreme urgency
brought about by unforeseen events existed and that the time limits laid
down in the Directives could not be kept with regard to faculty and
school premises being inappropriate for demand,101 the construction of
avalanche barriers,102 refusal of approval by an administrative body,103
transport of waste,104 flood protection,105 and environmental considera-
tions of a conveyor belt between a power plant and a mine.106
Lastly, the Directive permits the creation of a special award procedure
designed for subsidized housing schemes.107 It may be employed in those
cases where the size, complexity and estimated duration of the work
require the planning to be based from the outset on close collaboration
within a team of the contracting authorities, experts and the contractor
responsible for carrying out the works.
95 Case C-328/92 Commission v Spain [1994] ECR I-1569, para 18; C-24/91
Commission v Spain [1992] ECR I-1989, para. 13; C-394/02 Commission v Greece
[2005] ECR I-4713, para. 34; C-126/03 Commission v Germany [2004] ECR
I-11197, para. 23. A number of cases emphasize the need for a casual link between
the unforeseeable event and the extreme urgency. See, to that effect, C-394/02
Commission v Greece [2005] ECR I-4713, para. 40; C-107/92 Commission v Italy
[1993] ECR I-4655, para. 12; C-318/94 Commission v Germany [1996] ECR I-1949,
para. 14. For case law relating to technical reasons see C-57/94 Commission v Italy
[1995] ECR I-1249, para 24; C-385/02 Commission v Italy [2004] ECR I-8121, paras
18, 2021.
96 C-328/92 Commission v Spain [1994] ECR I-1569, para 17.
97 C-324/93 Evans Medical [1995] ECR I-563, para. 49.
98 C-57/94 Commission v Italy [1995] ECR I-1249, paras 21 and 25.
99 Joined cases C-20/01 and 28/01 Commission v Germany [2003] ECR I-3609,
para. 58.
100 C-394/02 Commission v Greece [2005] ECR I-4713, para. 39.
101 C-24/91 Commission v Spain [1992] ECR I-1989, paras 1214.
102 C-107/92 Commission v Italy [1993] ECR I-4655, para. 14.
103 C-318/94 Commission v Germany [1996] ECR I-1949, paras 1819.
104 C-126/03 Commission v Germany ECR I-11197, para. 23.
105 C-385/02 Commission v Italy [2004] ECR I-8121, para. 28.
106 C-394/02 Commission v Greece [2005] ECR I-4713, paras 4145.

In addition to the above-mentioned procurement procedures, the

Directive provides for three other purchasing formats that employ elem-
ents of the existing procedures. These are (i) framework agreements,
(ii)dynamic purchasing systems, and (iii) electronic auctions.
Framework agreements are made between a contracting authority and
one or more economic operators, and establish the terms governing con-
tracts to be awarded during a period not exceeding four years.108 The public
contracts that are based upon such framework agreements are governed by
the procedures described in Article 32(3) and (4) of Directive 2004/18/EC.
Dynamic purchasing systems are electronic processes for executing
common purchases of products readily provided for in the market. They
largely follow the rules of the open procedure,109 and are open to any
economic operator throughout the whole duration110 of the system that
submits an indicative tender and meets the predetermined selection criteria
and product requirements set by the procuring entity.111
The Directive also provides for electronic auctions. These are repetitive
processes involving electronic devices, which present after full evaluation
of the tenders new prices, relative rankings, revised downwards and/or
new values concerning certain elements of tenders and allow the employ-
ment of an automatic ranking method.112
4.2 Rules on Advertising and Transparency
To ensure the development of effective competition in the field of public

procurement contracts, notices of such contracts must be advertised
throughout the Union,113 containing sufficient information and crite-
ria114 to enable operators to determine if they are of interest to them.115
Adopting the Common Procurement Vocabulary (CPV)116 and standard
108 See Directive 2004/18/EC, Arts 1(5) and 32(2).

109 Directive 2004/18/EC, Art. 32(2).
110 The validity of a dynamic purchasing system may not last for more than
four years except in exceptional cases: Directive 2004/18/EC, Art. 32(7).

111 See Directive 2004/18/EC, Arts 1(6) and 33.
113 Directive 2004/18/EC, recital 36.
114 Directive 2004/18/EC, Art. 36(1) and Annex VII A.
115 In C-31/87 Beentjes [1988] ECR I-4635, paras 3334, the Court held that
notices must contain at least some mention of the specific conditions which a
contractor must meet in order to be considered suitable for a tender. Eligibility
considerations are discussed below in more detail.
116 See Regulation (EC) No. 2195/2002 of the European Parliament and
Council, OJ L 340 of 16 December 2002, 1.

Appendix 1 233
notice contracts fosters additional visibility.117 It should be noted that

the principle of non-discrimination applies to all stages of the tendering
procedure,118 and the transparency principle even though it does not
require the execution of a tendering procedure seeks to ensure access to
appropriate information for foreign economic operators.119
Contracting authorities are required to make a prior notification as soon
as possible after the start of the budgetary year, through the Commission
or through their buyer profile120 on their respective home pages,121 for
supplies and services intended to be awarded during the next 12 months,
with an estimated total value of the contract or framework agreement of
at least 750,000.122 While products are to be notified in conformity with
the CPV nomenclature, services are to be categorized in accordance with
Annex II A.123
Similarly, construction contracts or framework agreements in excess
of the specified thresholds124 specified in Article 7, and taking account
of Article 9, must be notified as soon as the decision is made to approve
the planning of the project. Publication of such information notices is,
however, obligatory only where the time limits for the receipt of tenders
are shortened.125
For the purpose of public contracts or framework agreements of
open, restricted, or negotiated procedures with publication, competi-
tive dialogues or dynamic purchasing systems, contract notices are to
be used. The publication of procurement notices including those for
the accelerated procedure126 is conditional upon notification of the
Commission.127 Such notification is subject to particular formats and
117 Directive 2004/18/EC, recital 36 and Directive 2004/18/EC, Arts 36(1) and
77(2).
118 C-16/98 Commission v France [2000] ECR I-8315, para. 107.
119 C-231/03 Consorzio Aziende Metano (Coname) v Comune di Cingia de
Botti [2005] ECR I-7287, para. 21.
120 In such a case the contracting authority must send the Commission an
electronic notice in accordance with the format and detailed procedures indicated
in point 3 of Annex VIII. See Directive 2004/18/EC, Art. 35(1).
121 See Directive 2004/18/EC, Art. 35(1) and point 2(b) of Annex VIII.
122 See Directive 2004/18/EC, Art. 35(1)(a)(b). Arts 7 and 9 of the same
Directive are to be taken into account.

123 See Directive 2004/18/EC, Art. 35(1)(a)(b).
124 Directive 2004/18/EC, Art. 7. Art. 9 of the same Directive has to be taken
into account.
125 See Directive 2004/18/EC, Arts 35(1) and 38(4), and C-225/98 Commission
v France [2000] ECR I-7445, para. 38.


methods of transmission,128 contains compulsorily and unconditionally

required information129 and is published by the Commission, in the offi-
cial Union language chosen by the contracting authority no later than five
days after the notification has been sent to the Commission.130 Summaries
are available in other official languages.
Linked to the notification requirement, the contracting authority is
also subject to particular rules concerning contract award criteria relat-
ing to technical specifications,131 variants,132 conditions for contract
performance,133 environmental protection,134 employment protection pro-
visions and working conditions, and taxation.135 All share in common that
they can be established provided they are included in the contract docu-
mentation. The first two cases of notification requirements in particular
merit further attention. Technical specifications must afford equal access
for tenderers and open up the public procurement market to competition,
employ widely used specifications or their equivalents.136 If performance
or functional requirements are used, they have to be sufficiently precise.137
Specifications not included in the contract documentation and local
content requirements that are in conflict with EU law are not permis-
sible.138 Where the criterion for award is that of the most economically
advantageous tender, variants may be accepted by the contracting author-
ity provided that this is expressly stated in the contracting documentation
and clear minimum specifications are provided.139
128 See Directive 2004/18/EC, Art. 37(2) and Annex VIII, para. 3.
129 C-359/93 Commission v Netherlands [1995] ECR I-157, para. 20.
130 If the format and procedures for transmission are not complied with, the
notice must be published within 12 days and, in the case of the accelerated proce-
dure, within five days.
134 See Joined Cases C-20/01 and C-28/01 Commission v Germany [2003] ECR
I-3609, para. 60; C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 57.
136 Directive 2004/18/EC, Art. 23(3)(a). The inclusion of the term or equiva-
lent is mandatory. See C-45/87 Commission v Ireland [1988] ECR 4929, para.
22; C-359/93 Commission v Netherlands [1995] ECR I-157, para. 27; C-59/00 Bent
Mousten Vestergaard [2001] ECR I-9505, para. 22. See also C-71/92 Commission v
Spain [1993] ECR I-5923, para. 62.
138 Directive 2004/18/EC, Art. 23(1). For local content requirements see
C-243/89 Commission v Denmark [1993] ECR I-3353, paras 4 and 23.

139 Directive 2004/18/EC, Art. 24. See also C-421/01 Traunfellner [2003] ECR
I-11941, para. 30.

Appendix 1 235
In light of the objective to develop effective competition and trans-

parency, it is not surprising that the notification requirements are also
subject to particular stipulations governing the time-frame of such official
announcements. Depending on the procurement procedure adopted and
the publishing of a prior notification, the mandatory minimum time limit
for receipt of requests to participate and for the receipt of tenders varies
from 22 to 52 days for normal procedures and can be as little as 10 days for
the accelerated procedure.140 In general, when a public contract has been
awarded or a framework agreement been concluded, the Commission has
to be notified within 48 days.141
Particular procedures ensure that economic operators are simultane-
ously invited in time and through generally available means of commu-
nication142 to submit tenders, and that they have all relevant information
and adequate access to the documentation143 concerned in order to prevent
any form of discrimination and to ensure transparency and equality of
opportunity.144 Candidates and tenderers are to be informed as soon as
possible, and within a period of 15 days at the latest, as to their success
or failure to participate in a framework agreement, a dynamic purchasing
system or the award of a contract.145 Relevant information concerning the
selected bid and the name of the successful bidder, as well as the reasons
for the rejection of the unsuccessful application, is given upon request146
in order to enable tenderers to defend their rights and to enable the Court
to exercise its supervisory powers.147
Contracting authorities draw up a report for every contract, frame-
work agreement and dynamic purchasing agreement for documentary
purposes and are obliged to communicate it to the Commission upon
request.148

144 C-87/94 Commission v Belgium [1996] ECR I-2043, para. 55.
146 Directive 2004/18/EC, Art. 41(2).
147 See T-19/95 Adia Interim SA v Commission [1996] ECR I-321, paras
3132; T-166/94 Koyo Seiko v Council [1995] ECR II-2129, para. 103; T-169/00
Esedra v Commission para. 192; T-183/00 Strabag Benelux v Council [2003]
ECR I-135, paras 5457; T-4/01 Renco v Council [2003] ECR II-171, paras
9295.

4.3 Conduct of the Procedure/Eligibility for Tender
Having presented the European public procurement rules governing the

publication requirements for tenders in order to foster effective compe-
tition and to allow economic operators to determine whether they are
interested in it, this section is concerned with another important issue: the
right of contracting authorities to evaluate the eligibility of candidates to
participate in the tender.
According to Article 44 of Directive 2004/18/EC, contracts may be
awarded only on the basis of specific criteria149 (which are discussed
below) and only to those economic operators that are not excluded on
grounds of misconduct150 or their unsuitability to pursue the professional
activity.151 Additional criteria for eligibility to submit tenders152 relate to
financial and economic standing, professional and technical knowledge
and ability, as referred to in Articles 47 to 52 of Directive 2004/18/
EC, and, where appropriate, criteria contained in transparent rules on
non-discrimination.153
Minimum capacity requirements concerning the financial and eco-
nomic standing, professional and technical knowledge, and ability of the
candidate which are related and proportionate to the subject matter of
the contract may be established154 by the contracting entity.155 Bank
149 As laid down in Directive 2004/18/EC, Arts 5355.

150 Directive 2004/18/EC, Art. 45. Candidates shall be excluded on the ground
of participation in a criminal organization, corruption, fraud affecting EU finan-
cial interests (see Art. 1, Convention drawn up on the basis of Article K.3 of the
Treaty on European Union, on the protection of the European Communities
financial interests, OJ C 316, 27 November 1995, 4957) and money laundering.
They may be excluded in the event of bankruptcy, on being wound up or subject
to proceedings for declaring bankruptcy, on conviction for professional conduct,
having been guilty of grave professional misconduct proven by contracting
authorities, failure to fulfil social security obligations or to pay taxes, or in the case
of misrepresentation of information.
151 Directive 2004/18/EC, Art. 46. In their country of origin economic opera-
tors must be qualified for the work they wish to contract.

152 It should be emphasized that the examination of the suitability of contrac-
tors to participate in an award procedure is logically separable from the award

procedure itself. The former deals strictly with the ability to fulfil the (capacity)
requirements of the contract while the latter seeks to determine the winner of
the contract. Yet this does not bar contracting authorities from conducting both
examinations in parallel: see C-31/87 Beentjes [1988] ECR I-4635, paras 1517;
C-315/01 GAT [2003] ECR I-6351, para. 59.
154 Ibid.
155 In Joined Cases 27 to 29/86 SA Constructions et enterprises industrielles

Appendix 1 237
statements, insurances against risks, balance-sheets and statements of

turnover and other documents may be used to constitute valid proof of
financial and economic standing.156 Subcontracting and the formation
of consortia are permissible means to fulfil the required capacity require-
ments.157 The Court has held that contracting entities may request refer-
ences other than those expressly mentioned in the Directive to assess the
financial and economic standing of candidates.158
The technical and professional ability of economic operators is assessed
on the basis of a wide range of accepted documents and indicators.159
Operators established in another Member State may be asked to present
only those documents that are listed in the Directive.160 Here, too, subcon-
tracting and the formation of consortia are expressly permitted.161
Under certain circumstances162 a contractor itself is thus not obliged to
fulfil the criteria for financial and economic standing, nor those relating
to technical and professional ability the availability of the necessary
resources is sufficient.163 Yet it is clear that a contractor may not delegate
responsibility and may be asked by the contracting authority to indicate
the share of the contract that is being subcontracted;164 the contractor
(CEI) and Others [1987] ECR 3347, para. 13, and in C-31/87 Beentjes [1988] ECR
I-4635, para. 17, the Court clarified that the purpose of the two criteria is to deter-
mine the references or evidence which may be furnished in order to establish the
contractors financial and economic standing and technical knowledge or ability.
156 Directive 2004/18/EC, Art. 47(1).
157 Directive 2004/18/EC, Art. 47(2) and (3). Rules about the composition of
groups of contractors are a matter for the Member States: see C-57/01 Makedoniko
Metro [2003] ECR I-1091, para. 61.
158 Directive 2004/18/EC, Art. 47(5); Case 76/81 Transporoute [1982] ECR
I-417, paras 910 and 15; Joined Cases 27 to 29/86 SA Constructions et enterprises
industrielles (CEI) and Others [1987] ECR 3347, paras 89 and 13.
159 Directive 2004/18/EC, Art. 48(2).
160 See Directive 2004/18/EC, Art. 48(1). See also Case 76/81 Transporoute
[1982] ECR I-417, para. 15; C-225/98 Commission v France [2000] ECR I-7445,
para. 88.
161 Directive 2004/18/EC, Art. 48(3) and (4). Rules about the composition of
groups of contractors are a matter for the Member States: see C-57/01 Makedoniko
Metro [2003] ECR I-1091, para. 61.
162 C-176/98 Holst Italia [1999] ECR I-8607, para. 28.
163 C-389/92 Ballast Nedam Groep I [1994] ECR I-1289, paras 1217; C-5/97
Ballast Nedam Groep II, [1997] ECR I-7549, para. 13; C-176/98 Holst Italia [1999]
ECR I-8607, paras 2531; C-314/01 Siemens and ARGE Telekom [2004] ECR
I-2549, paras 4344; C-399/98 Ordine degli Architetti delle Province di Milano e
Lodi and Others [2001] ECR I-5409, para. 92; C-126/03 Commission v Germany
[2004] ECR I-11197, para. 22.

may even be required to fulfil essential parts of the contract by itself if the
technical and economic capabilities cannot be ensured otherwise.165
If contracting authorities seek to employ quality assurance or environ-
mental management standards, they should refer to European standards
or the Community Eco-Management and Audit Scheme and recognize
equivalent certificates that exist in other Member States or evidence of
equivalent measures of economic operators.166
Member States may establish official lists of approved economic opera-
tors and certification by bodies established under public or private law.167
4.4 Award of the Contract
Contracts must be awarded to the eligible candidate submitting the most

economically advantageous tender in accordance with clear,168 objective169
and coherently employed170 criteria mentioned in the contract documenta-
tion or the notice for tender,171 which are linked to the subject matter172
165 C-314/01 Siemens and ARGE Telekom [2004] ECR I-2549, para. 45.
166 Directive 2004/18/EC, Arts 49, 5051.
168 All reasonably well informed and normally diligent tenderers should be
able to interpret the criteria in the same way: see C-19/00 SIAC Construction [2001]
ECR I-7725, paras 4142; C-448/01 EVN and Wienstrom [2003] ECR I-14527,
paras 52 and 57.
169 C-27/98 Fracasso and Leitschutz [1999] ECR I-5697, para. 31; C-247/02
Sintesi SpA [2004] ECR I-9215, para. 37; C-448/01 EVN and Wienstrom [2003]
ECR I-14527, para. 48.
170 C-19/00 SIAC Construction [2001] ECR I-7725, paras 4344; C-87/94
Commission v Belgium [1996] ECR I-2043, paras 8889; C-448/01 EVN and
Wienstrom [2003] ECR I-14527, paras 48 and 93.
171 C-87/94 Commission v Belgium [1996] ECR I-2043, para. 89; C-225/98
Commission v France [2000] ECR I-7445, para. 51; C-19/00 SIAC Construction
[2001] ECR I-7725, para. 40; C-470/99 Universale-Bau and Others [2002] ECR
I-11617, para. 98; C-331/04 ATI EAC and Others [2005] ECR I-10109, para. 21;
C-421/01 Traunfellner [2003] ECR I-11941, para. 30; T-4/01 Renco v Council [2003]
ECR II-171, para. 66.
172 C-513/99 Concordia Bus Finland [2002] ECR I-7213, para. 59; Case
C-448/01 EVN and Wienstrom [2003] ECR I-14527, para. 66; C-331/04 ATI EAC
and Others [2005] ECR I-10109, para. 21. Yet it should be noticed that criteria used
to identify the economically most advantageous tender do not have to be purely
economic since other factors may influence the value of a tender: see C-513/99
Concordia Bus Finland, ibid., para. 55; T-4/01 Renco v Council [2003] ECR II-171,
para. 67. Contracting authorities enjoy a wide discretion in assessing the factors
to be considered for deciding to award a contract following an invitation to tender
and the Courts review is limited to examining if there has been a serious and
manifest error: see T-19/95 Adia Interim SA v Commission [1996] ECR I-321, para.

Appendix 1 239
of the contract and are presented with a relative weighting173 or are at

least ranked in descending order of importance.174 On a more general
note, contract criteria should be aimed at identifying the most economi-
cally advantageous submission175 and effectively limit the discretion of
the contracting authority.176 As an alternative to the economically most
advantageous tender, contracts may be awarded simply on the basis of the
lowest price.177 Whichever awarding benchmark is used, it is clear that the
evaluation criteria used, as with any other national measure, must comply
with the principle of non-discrimination and are subject to EU law and the
objectives of the Directive.178
In addition to the stipulations governing the award of contracts, the
Directive contains obligations governing the conduct of contracting
authorities who receive abnormally low tenders.179 The Directive requires
the contracting authority to request, in writing, such a tenderer to furnish
49; T-203/96 Embassy Limousines & Services v European Parliament [1998] ECR
II-4239, para 56; T-139/99 Alsace International Car Service v European Parliament
[2000] ECR II-2849, para. 39.
173 C-470/99 Universale-Bau and Others [2002] ECR I-11617, para. 97; C-448/01
EVN and Wienstrom [2003] ECR I-14527, para. 39; C-331/04 ATI EAC and Others
[2005] ECR I-10109, para. 24; C-87/94 Commission v Belgium [1996] ECR I-2043,
para. 88.
174 Directive 2004/18/EC, Arts 53(1)(a)(2).
175 C-31/87 Beentjes [1988] ECR I-4635, para. 19; C-324/93 Evans Medical
[1995] ECR I-563, para. 42; C-513/99 Concordia Bus Finland [2002] ECR I-7213,
para. 59; C-448/01 EVN and Wienstrom [2003] ECR I-14527, para. 37; C-19/00
SIAC Construction [2001] ECR I-7725, paras 3536; C-315/01 GAT [2003] ECR
I-6351, para. 64; T-183/00 Strabag Benelux v Council [2003] ECR I-135, para. 74.
176 C-31/87 Beentjes [1988] ECR I-4635, para. 26; C-19/00 SIAC Construction
[2001] ECR I-7725, para. 37; C-513/99 Concordia Bus Finland [2002] ECR I-7213,
paras 6164; C-448/01 EVN and Wienstrom [2003] ECR I-14527, para. 37;
C-331/04 ATI EAC and Others [2005] ECR I-10109, para. 21. For an interesting
case on discriminatory criteria see C-234/03 Contse SA and Others [2005] ECR
I-9315.
178 The Court ruled in C-247/02 Sintesi SpA [2004] ECR I-9215, paras 4042,
that Member States are precluded from creating rules for the purpose of awarding
public works contracts following open or restricted tendering procedures, which
impose a general and abstract requirement that a contract authority only uses the
criterion of the lowest price even if the authority could have benefited from other
objective award criteria that were more likely to ensure free competition. For the
obligation that criteria must be applied in conformity with procedural rules and
principles of EU law see C-448/01 EVN and Wienstrom [2003] ECR I-14527, para.
38; C-31/87 Beentjes [1988] ECR I-4635, paras 2931; C-513/99 Concordia Bus
Finland [2002] ECR I-7213, paras 6263.

explanations and verify these before it may decide to reject the tender and
inform the Commission of any undue granting of state aid.180 Member
States are thus not allowed to introduce provisions that require the
automatic exclusion of abnormally low tenders determined on the basis
of a mathematical criterion instead of obliging the contracting authority
to apply the examination procedure required by the Directive181 even
though mathematical criteria may well be used to identify abnormally low
submissions.182
The European public procurement law not only governs the rejection
of candidates but also allows for the discontinuation or withdrawal of
an award procedure.183 Since the Directive only requires that candidates
and tenderers be informed as soon as possible and are given the grounds
for taking the decision not to conclude a framework agreement or a
contract,184 case law is insightful.
The Court has held that a decision not to award a contract put out
to tender is limited to exceptional cases or must necessarily be based on
serious grounds.185 Furthermore, it has ruled that there is no implied
obligation on a contracting authority to carry the award procedure to a
180 For cases regarding abnormally low tenders see Case 76/81 Transporoute
[1982] ECR I-417, para. 18; C-304/96 Hera SpA v USL and Impresa Romagnoli
Spa [1997] ECR I-5685, para. 16; Joined Cases C-285/99 and C-286/99 Impresa
Lombardini SpA Impresa Generale di Construzioni v ANAS [2001] ECR
I-9233, paras 5355. On state aid and public procurement see C-94/99 ARGE
Gewsserschutz [2000] ECR I-11037, para. 36.
181 Joined Cases C-285/99 and C-286/99 Impresa Lombardini SpA Impresa
Generale di Construzioni v ANAS [2001] ECR I-9233, paras 4446; C-103/88

Fratelli Costanzo [1989] ECR I-1839, paras 1921; C-295/89 Don Alfonso [1991]
ECR I-2967 Summary publication, para 1 and 2 of the operative part.
182 Joined Cases C-285/99 and C-286/99 Impresa Lombardini SpA Impresa
Generale di Construzioni v ANAS [2001] ECR I-9233, para. 73.

183 It should be noticed that only withdrawals of tenders are allowed, not the
change of award criteria: see C-448/01 EVN and Wienstrom [2003] ECR I-14527,
para. 95.
184 Directive 2004/18/EC, Art. 41(1).
185 C-244/02 Kauppatalo Hansel Oy v Imatran Kaupunki [2003] [2003] ECR
I-12139, para. 29. Yet quite contrary to this, in C-27/98 Metalmeccanica Fracasso
SpA [1999] ECR I-5697, paras 2425, it states that the contracting authoritys
option not to award a contract put out to tender or to recommence the tendering
procedure is not subject to the requirement that there must be a serious or excep-
tional case. This contradiction is extended to other public procurement directives
by the Courts finding that Directives 92/50, 93/36 and 93/37 constitute the core of
EU law and that there is no reason to give a different interpretation to them. See
C-244/02 Kauppatalo Hansel Oy v Imatran Kaupunki, ibid., paras 3435; C-513/99
Concordia Bus Finland [2002] ECR I-7213, paras 9091.

Appendix 1 241
conclusion.186 Withdrawals of tenders have been permitted when there

was only one suitable tender187 or when a withdrawal became necessary as
a result of errors committed by the contracting authority itself.188 Yet it is
equally clear that a contracting authoritys decision to withdraw an invita-
tion to tender must be open to a review procedure.189
5. GENERAL RULES
Besides the rules governing the procedures and conduct of contract-
ing authorities, the Directive also establishes statistical obligations for
Member States190 to present detailed191 reports on public procurement
and an advisory committee to assist the Commission in matters relating to
public contracts.192 The Commission is empowered to revise thresholds193
and to amend a wide range of relevant factors specified in the Directive.194
Last but by no means least, it has to be mentioned that the Directive
expressly refers to Council Directive 89/665/EEC concerning review proce-
dures and obliges Member States to ensure the implementation of the pro-
curement Directive by effective, available and transparent mechanisms.195
6. PROCUREMENT REFORM
The European Commission has recognized the lack of market integration

in the area of public procurement and has included it in a reform package
para. 30; C-92/00 Hospital Ingenieure Krankenhaustechnik Planungs GmbH [2002]

ECR I-5553, para 41. In more general terms see T-203/96 Embassy Limousines &
Services v European Parliament [1998] ECR II-4239, paras 5455.
187 C-27/98 Metalmeccanica Fracasso SpA [1999] ECR I-5697, para. 33.
para. 36.
189 See Directive 89/665, Art. 1(1); C-26/03 Stadt Halle and RPL
Recyclingpark Lochau GmbH v Arbeitsgemeinschaft Thermische Restabfall und

Energieverwertungsanlage TREA Leuna [2005] ECR I-1, para. 32; C-92/00 Hospital
Ingenieure Krankenhaustechnik Planungs GmbH [2002] ECR I-5553, paras 5455.
192 Directive 2004/18/EC, Art. 77(1), and Decision 71/306/EEC.
195 Directive 2004/18/EC, Art. 81. See also C-315/01 GAT [2003] ECR I-6351,
para. 44; C-327/00 Santex SpA [2003] ECR I-1877, para. 66.

of 12 priority measures to give a new impetus to the internal market. The

proposed legislative changes are expected to be completed by mid-2014.
The public procurement reform aims to: (i) simplify procedures on
the signing of public contracts; (ii) reduce the administrative burden
created by the requirements for submitting documents to enable small and
medium-sized firms to become more active in the market; (iii) introduce
more possibilities for negotiated tender procedures; (iv) create more trans-
parency, and it may lead to a more extensive application of EU public
procurement rules.

Appendix 2
Appendix 2: China an overview of

public procurement law
1. INTRODUCTION
This chapter will give a general overview of the Chinese public procure-
ment legislation. It starts with a concise and general introduction to
the field of law and follows the logic of a procurement procedure from
determining the applicable law to the criteria employed in awarding the
contract. After covering the field of law in Section 2, the applicable law
is considered in Section 3. Issues raised here include the personal scope,
thresholds and the material scope. The substantive provisions of the law
are addressed in Section 4. Here issues of procedure, transparency of
tenders and eligibility requirements for candidates are examined. Last but
not least, the award of the contract is discussed. This section touches upon
the awarding criteria that may be employed and upon rules that govern
the conduct of public procurement authorities in the event of the need to
discontinue a procurement procedure. Section 5 closes this overview with
a reference to the general provisions.
This systematic treatment provides the framework for a clear recogni-
tion of the areas of law which need to be fleshed out in more detail in order
to provide for an effective treatment of bid rigging conspiracies. Before
starting, it should be mentioned that in China the more detailed regula-
tions to implement provisions are often left for state organs to draft, since
the laws appear to be rather general and avoid detailed stipulations.
Before engaging in any legal assessment, it is appropriate to clarify the
terminology. Public procurement is generally understood as the entire
process of the acquisition of goods, services, works and other supplies by
the public service, which is usually executed by means of a contractual
arrangement following public competition.1 Public procurement legisla-
tion seeks to establish rules and procedures to govern the way in which
contracting authorities purchase. Thus particular importance rests upon
the purpose and objective of such legislation.
1 See, in this context, Government Procurement Law (GPL), Art. 2.
243

2. FIELD OF LAW
With public procurement law the Chinese legislator seeks to regulate
procurement activities, increase the benefits of funds, protect the interests
of the state and the special public interest, defend the lawful rights of the
parties concerned and promote a clean government.2 An objective of the
procurement legislation that has been much cited in the media3 is the
eradication of corruption,4 which is widely recognized as a major problem.5
In the absence of uniform legislation, trial regulations have been used
since the mid-1990s in many provinces and municipalities to execute
procurements.6 The first uniformly applicable law relating to procure-
ments in the construction sector7 entitled the Bidding Law of the
Peoples Republic of China (BL) was enacted in 2000, and predates the
Government Procurement Law of the Peoples Republic of China (GPL)
by three years.8 The GPL entered into force on 1 January 2003. As will be
explained below, the exact delineation between these two laws is not clear;
yet it appears that the GPL could be viewed as a framework law while the
BL governs a narrower field,9 with partial overlap of some procedural
elements. The present description therefore concentrates mainly on the
GPL and considers the BL where appropriate.
3. APPLICABLE LAW
In order to determine whether the GPL is applicable, a number of elem-

ents must be fulfilled. First, a procuring entity has to fall within the
personal scope of a contracting authority. Second, the envisaged contract
value must surpass a specific threshold or the subject matter of the con-
tract has to be included in a special list commanding the application of the
2 See GPL, Art 1.

3 See Peoples Daily (2002a) and (2002b).
4 This is also expressly addressed in Chapter VIII on liabilities.
5 See Peoples Daily (2001).
6 See also Xinhua News Agency (2002).
7 See BL, Art. 3.
8 The BL was promulgated on 30 August 1999 and entered into force on 1
January 2000.
9 See , , , (Administra-tive
Law Review), 2001 03 (The Supreme Courts Notice on carefully studying

and implementing the anti-monopoly law of the Peoples Republic of China:
Gan, Peizhong and Tao Wu (2001), Debates about the application scope of the
Government Procurement Law, No. 3).

Appendix 2 245
law. Issues addressed in this section include the personal scope, thresholds
and the material scope.
3.1 Personal Scope
The personal scope of the GPL appears to be constructed broadly.

According to Article 15 GPL it extends to any state organ, public insti-
tution or body that holds government procurements according to law.
Besides the possibility that the procuring entity may execute the pro-
curement itself, there are two forms of intermediary agency that can be
employed for purchasing: centralized and non-centralized procurement
agencies.
Centralized procurement organs may be established by cities with dis-
trict and the peoples governments at the level of autonomous prefecture
and above.10 They are non-profitable public institutions and must ensure
that prices are below average market prices and that efficiency and quality
requirements are observed.11 These centralized organs generally execute
the procurement of goods mentioned in the centralized procurement list,12
but they can also be entrusted to procure non-listed items.
Non-centralized procurement agencies are intermediary agencies
accredited by an authority, which can be approached by institutions to
conduct procurements at their own discretion13 in the case of non-listed
items.
3.2 Thresholds
After elaborating upon the definition of procuring entities for the

purpose of the applicability of the GPL, the second element to be con-
sidered is the system of thresholds. Entities wishing to procure goods or
services and who fall within the personal scope of the law will only have
to comply with it in respect of contracts drawing upon approved14 gov-
ernment resources that exceed particular thresholds.15 Unfortunately the
law neither states the particular threshold levels nor gives a definition of
public fiscal funds.
10 See GPL, Art 16.

11 See GPL, Arts 1617.
12 See GPL, Arts 2, 7 and 18.
13 See GPL, Art. 19.
14 See GPL, Arts 6 and 33.
15 See GPL, Art. 2.

3.3 Material Scope
As well as the personal scope and threshold requirements, the field of

application is delineated by issues that relate more to the material scope
of the procurement project. As with other procurement systems, there
are a number of derogations from the procurement law. These relate to
emergency procurements in the case of natural disasters, force majeure, or
procurements involving security issues or state secrets.16 Military procure-
ments also are not within the scope of the GPL.17
The GPL embraces all other procurements of goods and services.18
This, in principle, also includes construction projects. Article 4 GPL calls
for the application of the Bidding Law for construction projects in those
cases where the bidding method, the default procurement method, is used.
The wording of this article therefore produces two complications. A literal
interpretation of its wording suggests that, in the case of all other procure-
ment formats, the GPL and not the BL applies, irrespective of whether
it deals with construction projects,19 and, secondly, that the BL would
only be applicable for construction project biddings and not for biddings
of goods and services. Despite the fact that the latter point would be in
accordance with the BL itself,20 it would leave the GPL without any proce-
dure governing the execution of biddings.21 While legal scholars in China
are aware of this legal gap, the practical implications may be limited. Since
the GPL is directed towards administrative bodies that are expected to
understand the legislators intent, they will apply the bidding procedures
as set out in the BL and apply the BL for construction projects.
4. SUBSTANTIVE RULES
While the previous section is relevant for the applicability of public

procurement legislation to the contract at hand, the next issue is the
determination of the relevant substantive rules. This section describes
the various elements and stages of the procurement procedure. The
16 See GPL, Art.85.

18 See GPL, Arts 2731. Curiously, according to GPL, Art. 32, price inquires
may be used only for goods but not for services.

19 This runs counter to BL, Art. 3.
20 See BL, Art. 3.
21 Other procurement formats set out in the GPL offer some procedural guid-
ance. This point is elaborated further below.

Appendix 2 247
first part presents the procedures and purchasing formats that may be
employed by contracting authorities. Thereafter the rules on advertising
and transparency of procurement projects are reviewed. The authoritys
right to examine the eligibility of candidates to participate in a tendering
procedure is then considered, followed by an examination of the actual
award of the contract.
4.1 Procurement Procedures and Purchasing Formats
The Chinese GPL provides five different methods of procurement. These

include public tender, bid invitation, competitive negotiations, single-
source purchases and price inquiries. This is by no means a closed list.22
Article 26 GPL expressly allows for additional measures to be allowed by
the supervising State Council.
The predetermined mode of procurement is the public call for bids.
Only in the case of necessity may one of the remaining procurement
formats be used, provided that the approval of the respective supervision
and administration department is granted.23 The law, however, fails to
define public tender, nor does it include any procedural rules specify-
ing how tenders are to be conducted. This legal gap is bridged by the
perception of procuring entities of the legislators intent expressed in
Article 4 GPL, which provides for the application of the BL in specific
circumstances.24 Given the overlapping content and that the GPL may
be viewed as lex posterior with respect to the BL, it is assumed that the
BL applies only with regard to procedural stipulations governing the
bidding process and bid opening. Consequently the main focus will rest
on BL Chapters III and IV. Eligible bidders have at least 20 days25 in
which to respond to calls for tender and to submit genuine bids26 to the
procuring entity in due time.27 The procuring entity certifies the receipt
of bids and keeps the documents sealed.28 Provided that the procuring
entity is informed in writing, a bidder may supplement, modify or revoke
any aspect of the submitted tender documents prior to the deadline.29

23 See GPL, Art. 7.
24 See discussion above.
25 See BL, Art. 24, and at least 15 days where publicized documents are modi-
fied. See BL, Art. 23.

26 See BL, Arts 27, 3031.
27 See BL, Art. 28.
28 See BL, Art. 28(1)(2).
29 See BL, Art. 29.

Presumably to minimize the risk of corruption30 and to allow bidders

time to adapt their documents, a stipulation obliges procuring enti-
ties to inform bidders of any changes 15 days before the submission
deadline.31
Another special procurement procedure is the invitation-based procure-
ment. The GPL clarifies that this procedure may be applied for goods
or services that are so special that they can only be procured in limited
scope,32 or in those cases where the cost of organizing a public tender is
disproportionate in comparison to the value of the total procurement.33 A
minimum of three randomly selected eligible suppliers34 must be invited
and given at least 20 days in which to submit their bid.35 The procure-
ment procedure may be cancelled if there are fewer than three eligible36
or acceptable37 submissions, if violations of the law have occurred,38 or
if important changes have taken place.39 After informing all bidders, new
procedures may be initiated.40
Competitive negotiations can be used if no eligible bid has been submitted
and it is not possible to hold new tendering procedures41 or to calculate the
total value of the contract.42 While impossibility is not specified, it does
include temporal constraints.43 Furthermore, this system may also be used
if the goods or services are so complicated or special that it is impossible to
determine the detailed specifications or concrete requirements.44 Reflecting
its field of application, this procedure requires the establishment of a
negotiating group, with an uneven number of members, at least two thirds
of which are experts charged with the selection of at least three eligible
suppliers, drawing up negotiation documents and conducting individual
negotiations.45 After bidders have submitted their final bid the purchaser
30 Corruption and collusive or abusive practices are outlawed by BL, Arts

3233.
31 See BL, Art. 23.
32 See GPL, Art. 29(a).
33 See GPL, Art. 29(b).
37 See GPL. Art. 36(c).
39 See GPL, Art. 36(d).
40 See GPL, Arts 3637.
42 See GPL, Art. 30(d).
43 See GPL, Art. 30(c).

Appendix 2 249
will select from among the suggested contractors in accordance with the
principles of conforming with the requirements of procurement, quality
matching the services, and the quotations being the lowest.46
Single-source procurements may be used in those circumstances where
other enterprises are not producing,47 or are presently unable to produce,
the desired goods or services.48 While no specific procedural guidance is
offered by the law, it is emphasized that the procurement has to be made
on the basis of ensuring quality of the procurement and reasonable
price.49
Direct price inquiries may be used for standardized goods for which
there are many sources and price changes are small.50 It should be noticed
that this procurement format is applicable only to goods, not to services.
It is also not quite clear why price change has been chosen as the relevant
criterion instead of price variation, which is more capable of ensuring
that the market price is being paid by the procuring entity. In view of this,
an uneven numbered inquiry group, consisting of at least two thirds of
experts, is to be set up. This group is charged with selecting at least three
eligible suppliers, drawing up criteria and prices, and conducting inquir-
ies.51 After bidders have submitted their final bids the purchaser will select
from among the suggested contractors in accordance with the principles of
conforming with the requirements of procurement, quality matching the
services, and the quotations being the lowest.52
4.2 Rules on Advertising and Transparency
In order to allow for the development of competition in the public pro-

curement market notices of tenders must be advertised. Information
relating to the procurement must be published in good time to the
general public.53 Mass media designated by authorities charged with the
supervision of government procurement is the channel that is generally
used except in cases involving business secrets.54 There is no central

51 See GPL, Art. 40(1)(3).
52 See GPL, Art. 40(4).
53 See GPL, Art. 11. Failure to do so is subject to punishment, see GPL, Art.
75. For open tenders see BL, Art. 16.

54 See GPL, Art. 11. For open tenders see BL, Art. 16.

registry where companies can find all intended procurements. The timings
of advertisements are of particular relevance for the standard procurement
mechanism of tendering, but unfortunately are not defined at all. It is only
with regard to open biddings55 and invitation-based biddings that a 20-day
requirement is imposed.56
In light of the principles mentioned in the GPL of openness, trans-
parency, fair competition, justice, honesty and trustworthiness,57 pub-
lication of the criteria to be used to evaluate submissions58 is required.
Furthermore, any decision maker whose impartiality is not beyond doubt
is obliged to resign from the procurement process.59 While the BL does not
list transparency, fair competition and trustworthiness among its princi-
ples, it adds to the above list by including credit-worthiness60 and includes
obligations to clearly determine and make public all relevant information
for the bidding project,61 and non-discrimination.62
4.3 Eligibility of Bidders
Having presented the Chinese public procurement rules governing the

publication requirements of tenders, intended to foster effective competi-
tion and to allow economic operators to determine if they are interested
in the tender, this section is concerned with another important issue: the
right of contracting authorities to evaluate the eligibility of candidates to
participate in the tender.63
According to Article 22 GPL contracts may be awarded only on the
basis of specific criteria and only to those economic operators64 that are
not excluded on grounds of misconduct.65 Additional criteria for eligibility
55 See BL, Art. 24. In addition, a 15-day notification period is imposed for any
clarifications or modification of bid-invitation documents: see BL, Art. 23.

57 See GPL, Art. 3.
60 BL, Art. 5.
61 BL, Arts 16(2) and 19.
62 BL, Art. 20.
63 Since the GPL is to be regarded as lex posterior, the relevant articles of the
BL are not elaborated here.

64 Providers of goods or services are defined as any legal person or other
organization or natural person that provides goods, projects or services to pur-

chasers. See GPL, Art. 21. Interestingly there is no express obligation to be a duly
established undertaking.
65 See GPL, Art. 22(d)(e).

Appendix 2 251
to submit tenders relate to financial and economic standing,66 professional

and technical knowledge and ability,67 and other requirements established
by laws and regulations.68 In addition, the procuring entity may stipulate
special reasonable conditions that do not give rise to different or discrimi-
natory treatment to providers in accordance with the specific requirements
of the subject matter of the contract.69
In addition to the above, there are three requirements for eligibility to
participate in tenders that merit particular attention. These relate to (i)
local content requirements, (ii) groups of contractors, and (iii) the assess-
ment of the suppliers qualification. Each is considered in turn.
Article 10 GPL introduces a strict local content requirement. Only
domestic products are to be purchased unless the item is not available
domestically or obtainable only under unreasonable circumstances, the
procurement made is designated to be used abroad or legally required by
other laws or regulations. The definition of what may be classified as a
domestic product is not given. It is, however, certain that clarity is needed
in order to determine whether domestic suppliers70 using foreign parts are
eligible.
In order to protect the procuring entity from concluding contracts
with inept producers, there are procurement laws to assess the ability of
potential contract partners to shoulder civil liability. The Chinese law
also contains such a provision,71 which provides for a curious specialty
concerning groups of contractors. Article 24 expressly obliges organiza-
tions that form a complex to participate in a public procurement tender to
individually meet all due requirements72 and to be able to assume joint and
several liability for the procurement contract.73 This naturally discourages
complexes with smaller undertakings.
In order to verify attestations made by undertakings and to examine the
general and specific requirements, relevant attestation documents relating

67 See GPL, Art. 22(c).
68 See GPL, Art. 22(f).
69 See GPL, Art. 22(f).
70 Here the term domestic supplier is employed because the law is biased
towards domestic goods and services. Taking the reform suggestions of the
European Chamber of Commerce into account, in practice this term appears to
be interpreted as Chinese suppliers, setting at a disadvantage foreign companies
or joint ventures duly set up under Chinese law. See European Chamber of
Commerce (2011), 9.
71 See GPL, Art. 22 (a).
72 As listed in GPL, Art. 22.
73 This obligation parallels the requirement contained in BL, Art. 31.

to a suppliers qualifications and business performances can be asked

for.74 It is, however, not clear whether uniform and standardized require-
ments are established that are equally valid in the whole country so as to
allow for a reduction in transaction costs.
4.4 Award of the Contract
The final step in the public procurement process is the award of the
contract. The selection of the winning bid takes place before this. With
regard to competitive negotiations and price inquiries, winners are selected
according to the principle of conforming with the requirements of pro-
curement, the quality matching the services and the quotations being the
lowest. Also, for single-source purchases, a basis for decision-making the
quality of procurement and the reasonable price is cited. Such guidance
is absent from invitation-based bids.75 It is only in the presence of clear
and transparent tender selection criteria that any fraudulent behaviour
can be detected and prevented.
The opening of bids and the awarding of contracts under the bidding
procedure is more complex and merits particular attention. All timely sub-
mitted bidding documents are opened at the time of the deadline in public
and in the presence of the tenderee and all tenderers, after the integrity of
the sealed envelopes has been established by the parties to the tender and
a notary.76 While the names of bidders, bid prices and other main contents
in the bid documents are immediately made public,77 the actual evaluation
of the submissions is carried out in secret.78 The examination of biddings
is conducted by a bid evaluation committee with an uneven number
of members, consisting of impartial experts79 that employ the criteria
contained in the invitation for tenders and predetermined base prices80
in accordance with the maxims of best quality or best value for money.81
Having invited bidders to clarify their submissions,82 the Committee then
drafts a report in accordance with which the procuring entity determines

75 Even though it is not stated in the law, it is possible that procuring entities
also turn towards the relevant provisions of the BL for inspiration.
76 See BL, Arts 3436.
77 See BL, Art. 36.
78 See also BL, Arts 4344.
79 See BL, Arts 3738 and 44.
80 See BL, Art. 40.
81 See BL, Art. 41. If no bid meets either requirement, the evaluation commit-
tee is to reject all bids. See BL, Art. 42.

82 See BL, Art. 39.

Appendix 2 253
the winning bid.83 All bidders are informed of the outcome and the written
contract is concluded.84
5. GENERAL ISSUES
In addition to the above stipulations, the Chinese law governs queries

and complaints,85 regulates supervision, inspection86 and data-keeping
duties,87 and spells out rules on legal liabilities.88
83 See BL, Art. 40.

84 See BL, Arts 4546.
85 See GPL, Chapter VI.
86 See GPL, Chapter VII.
88 See GPL, Chapter VIII.

Appendix 3
Appendix 3: History of Japanese

antitrust legislation
1. INTRODUCTION
The Japanese anti-monopoly law (AML)1 has been developing consider-

ably since its enactment. While, over long periods of time, it was subject
to dormant enforcement and weakening reforms, in recent years it has
broken free from outside pressures. This chapter seeks to present insight-
ful background information to allow for a better understanding of the
current enforcement context and the degree of independence achieved by
the enforcement authority.
In this chapter careful consideration will be given to the relevant indus-
trial policy as institutionalized by the Japanese Ministry of International
Trade and Industry (MITI) and the political developments to the extent
that they are conducive to foster a better understanding of the process of
emancipation by the JFTC. The chapter is divided into five time periods: the
occupation era, and developments in the 1950s, 1960s, 1970s and the 1980s.
In view of its persistent and heavy American influence, the occupation
era represents a special period in the development of Japanese antitrust.
Reflecting both American objectives and Japanese antipathy towards the
AML, this part presents the gradual japanification of the law or, more
positively speaking, its dismantling reforms. Because of their central role
in Japans economy, particular consideration will be paid to the dissolu-
tion of control agencies and zaibatsu.
During the 1950s, the emasculation of the AML continued. Industrial
policies, motivated by public interest criteria, gained more and more influ-
ence, leading to the impression that this decade was one of clear industrial
policy and large business interests and cartels. Meanwhile the JFTC was
left to struggle for its own survival, not daring to actively enforce the Act.
In the 1960s, Japan executed a new, more internationally oriented role
and started to support trade liberalization. MITI envisaged a new indus-
Trade (Act No. 54 of 14 April 1947) (hereinafter anti-monopoly law or AML).
254

Appendix 3 255
trial order to overcome the pressing economic problems of small-scale

industrial production, the large number of companies and the numerous
entries and exits of enterprises. While pro-collusive forces were in effect
shaping the regulatory framework and leaving little room for active AML
enforcement, the JFTC strived to enhance consumer protection and was
particularly active in bid rigging cases.
The decade of the 1970s saw a strong rise in the Commissions enforce-
ment potential. This was spurred by the hardship caused by the Nixon
shocks, the oil crisis and the overall poor economic situation which was
accompanied by soaring inflation and political inability.
The AML reform of 1977 was indeed the first reform to strengthen the
Act unambiguously. The heavy dependence of the Japanese depressed
industries on energy imports and the exchange rate appreciation empha-
sized the hardships endured by depressed industries. The Industry
Structure Law of 1983 was an extension of the formerly enacted Depressed
Industries Law, with limited effects on the JFTCs enforcement standards.
For the rest of the decade, formal AML enforcement remained limited.
The attention of the JFTC shifted from price fixing towards unfair trade
practices, retail price maintenance and, in particular, bid rigging. The
Structurally Depressed Industries Law was phased out in 1988 when the
bubble economy started.
2. ANTITRUST IN THE OCCUPATION ERA

(194553)
After the Second World War, Japan was a demoralized and bankrupt state
with immense domestic problems. It had to subjugate itself to new rulers,
who were determined to make a complex attempt to alter those Japanese
institutions and types of behaviour that had played a crucial role in the
war effort through a combination of dictation and persuasion.2 Under
the leadership of General Douglas MacArthur, the efforts of the Supreme
Commander of Allied Powers (SCAP) to democratize Japan were frus-
trated by three factors identified by Buckley:3 (i) moral aspects to employ
Carthaginian measures on the losers; (ii) the threat of communism
and Russian involvement; and (iii) the cooperative but unenthusiastic
response of the Japanese establishment to the proposed changes.4 Major
2 See Buckley (1999), 6 ff.

3 Ibid., 7.
4 Interestingly, other authors emphasize points (ii) and (iii), while placing

accomplishments embrace the new Constitution, land reform, tax reform,

the creation of labour unions, the dissolution of the zaibatsu and of the
control associations, and the introduction of antitrust legislation.5 Since
the dissolution of the control agencies and zaibatsu organizations is par-
ticularly noticeable from an antitrust perspective, they will be considered
briefly in Sections 2.1 and 2.2 before continuing with the anti-monopoly
law.
2.1 The Dissolution of Control Agencies
Control agencies (tseikai) were special legal entities, comparable to a

government-authorized cartel,6 with compulsory membership,7 the
explicit function of which was to allocate raw materials and set prices
in line with government orders8 and to distribute the products of its
member firms. These self-regulating control agencies were heavily influ-
enced by the Zaikai: the chief of the Planning Board was the CEO of the
largest enterprise within an industry.9 Bisson10 states that the zaibatsu
executed despotic power over all aspects of economic life,11 and
attempts by the control bureaucrats to contain their power were frus-
trated by increased self-regulation.12 The large number of such agencies
1,538, and 6,588 at the local level13 underlines their potentially14
strong anticompetitive effect on the economy. While the vast majority
little or no emphasis on the moral dimension. See Johnson (1982) and Headley
(1970).
5 The interested reader is referred to the classics in this field: Bisson (1954),
Headley (1970) and Yamamura (1967).

6 Johnson (1982), 153.
7 As was favoured by big firms and underlined in the Key Industries
Association Ordinance of 1941: see Schaede (2000), 251.

8 See Schaede (2000), 252.
9 See Johnson (1982), 153. From this point Johnson infers that the control
associations were utterly dominated by the zaibatsu. This point is also stated by
Headley (1970), 368, who contrasts this Fhrerprinzip to a majority vote system.
10 Bisson (1954), 3 and 201 ff.
11 Headley (1970), 11 ff, expresses similar views regarding the situation in 1945
and the effects of zaibatsu concentration on democracy.

12 Cf. Johnson (1982), 153, and Schaede (2000), 253.
13 SCAP Memorandum ESS/AC 15, April 1948, in Headley (1970), 368.
14 Friedman (1988), 6162, argues that smaller producers insinuated them-
selves to the regulatory network that was supposed to destroy them and criticizes
the widespread notion that the zaibatsu dominated the associations and their
perverse anticompetitive effect. He states that the tseikai became the centre of
competition for scarce materials among large, medium and small producers.

Appendix 3 257
of the wartime control associations were ordered to close in 1946, some

of them15 were still being used for product allocation until 1949 for fear
that their abolition would lead to disruptions in governmental product
allocation controls. Though generally judged to have been effective,
most of the dissolved associations soon reappeared16 with similar nega-
tive welfare effects. Having reviewed the dissolution of the control agen-
cies, the following passage will deal with the objectives and measures
taken to dissolve the zaibatsu.
2.2 The Zaibatsu Dissolution 1947
The dissolution of the zaibatsu defined as large and often family-

dominated17 holding companies, which traditionally had been very influ-
ential and contributed substantially to Japans war effort was viewed
by the allied powers to be a precondition for establishing a democratic
society. The influence18 of these organizations extended to oligopolistic
positions in the gamut of the modern sector of the economy.19 The
dissolution was obstructed by the limited information on Japanese indus-
tries available after the war, the lack of understanding on the part of the
Japanese administration and industrial organizations, conglomerates
presenting misleading information, and the fact that Japanese society
and government viewed SCAPs policies as attempts to dismantle the
nations industry base and thus only reluctantly followed MacArthurs
proposals.20
The Law for the Elimination of Excessive Concentration of Economic
Power (Kado keizai shuchu haijo ho) of 1947 represented the legal frame-
work for the dispossession and purge of zaibatsu family members. While
the allies succeeded in disentangling direct family ownership and vertical
top-holding ownership ties,21 it did not succeed in the full elimination
15 Schaede (2000), 73, cites iron and steel, rubber and lumber.
16 Ibid., 73.
17 Nissan, generally cited as one of the 10 zaibatsu, has never been family
dominated: see Headley (1970), 21.

18 Headley (1970), 30, states that the control the zaibatsu executed was very
strong: Ownership, personnel, credit, centralized buying and selling, and the
inculcation of feudal-like loyalty on the part of officers and employees to the busi-
ness families at the top all combined to produce a situation where there was unity
of purpose and action to these business groups.
19 See Headley (1970), 23. This is underlined by data presented in Tables 14-1
and 14-2, 3224 and 3267, ibid.

20 The incomplete purge of corporate officers is often cited in this context.
21 Though the designation of a large number of companies was reduced as

of zaibatsu appointees,22 implying that wartime controls could extend

into the post-war period.23 The objectives of the deconcentration policies
were political rather than economic in nature. Taking as a benchmark
the envisaged dispersion of ownership, management and control of
the Japanese economic system,24 the dissolution of conglomerates tied
together by holding companies served to reduce the normatively question-
able concentrations of economic influence25 and can thus be regarded as
successful.
2.3 The Anti-monopoly Law of 1947 and the Implications of the Road to
1953
The introduction of the Law concerning the Prohibition of Private

Monopolization and the Methods of Preserving Free Trade (AML) in
1947 was a laborious and durative process, which was finally concluded in
the last hours of the Yoshida Cabinet.26 The law had been subject to much
confusion and many objections27 since antitrust was not a central part of
pre-war Japanese reality.28
The AML aimed to promote free and fair competition and economic
growth, to foster employment and prosperity, to promote democracy and
consumer interests by prohibiting private monopolization, unreasonable
a result of political pressure from conservative groups in America: see Headley

(1970), 115.
22 See Headley (1970), 69, 79, 99 and elsewhere.
23 See Johnson (1982) for insights.
24 See Haley (1998), 888.
25 It should be noted that dismantling a holding company of a conglomerate
does not necessarily produce a change in concentration ratios in the oligopolistic

market; however, it can still serve to reduce economic influence since cordial oli-
gopoly is less likely to be established if the threat of retaliation in a different indus-
try, as was formerly the case in the zaibatsu dominated economy, is not perceived.
26 Bisson (1954), 181.
27 Despite the opposition of economic bureaucrats and big business, their
more lenient proposals (Schaede (2000), 74 states that MCI drew up a marginally
revised version of the 1931 Important Industries Control Law which was not quite
what SCAP had envisaged) were not entertained by SCAP and the strict versions
of the AML and the Trade Association law have been implemented with only one
significant change: the removal of the treble damages provision of private law
suits: see Beeman (1997b), 39.
28 Johnson (1982), 175, reports that some of the Japanese bureaucrats were
indeed puzzled by SCAPs proposals. Headley (1970), 120, states that its critics
found it difficult to understand why one would need a Deconcentration Law (Law
No. 207 of 1947) and an antitrust law.

Appendix 3 259
restraint of trade and unfair trade practices, undue and substantial dis-
crepancies in bargaining power, and imposed limitations on directorates
and stockholdings.29 This quote underlines Beemans finding of strong
political motivations and his claim that this law was an idealized version30
of the US antitrust laws, envisaging a particular role for competition and
business in a democratic society.31 The aims of the legislation are broad;
however, it is deemed to be delightfully vague.32 Thus, despite its (original)
intention, the effectiveness of the law is hampered through application
of the overly broad text. The implementation of the antitrust legislation
rested with the Fair Trade Commission (AML, Article 8),33 which had
a strong enforcement record in its early days34 and was vested with full
authority to summon witnesses, command the submission of documents
and conduct inspections; it was thus equipped with the adequate legal base
to fulfil its duty.35
Though one might be tempted to regard the beginning of the occu-
pation period, with its associated personal purges and democratic
reforms, as the beginning of a new age, one should not overestimate its
lasting success. For the establishments anticompetitive orientation,36
with its associated constraint of market competition and rejection of
the profitmotive,37 was still a marked feature of the Japanese economy
29 See AML Act No. 54 of April 1947, Chapter 1, Art. 1.

30 The law was indeed stricter than the American antitrust legislation: see Pape
(1979), 465.
31 Beeman (1997b), 38; similar claims are propagated by Mitsuo Matsushita
(1993), 78 ff; Pape (1979), 4645 and Haley (1998), 891.

32 Martin (1994), 66, uses this term with respect to Art. 2 of the Act. While this
is certainly true with regard to the present legislation, the original legislation was
more clearly defined, leaving less room for discretion.
33 Martin (1994), 62, states that its powers and duties are comparable to the US
Federal Trade Commission. Though it should be noticed that enforcement rights

in Japan rested with the JFTC only and were not shared with the Department of
Justice, as is the case in the US.
34 In the first two years of its existence, 236 violations were investigated, 17
hearing notices were issued and 72 industry studies were conducted. See Economic
and Scientific Section, GHQ, SCAP, Mission and Accomplishments of the
Occupation in the Economic and Scientific Fields (Tokyo), 26 September 1949, 2,
in Bisson (1954),185, footnote 11.
35 Ibid., 184.
36 Indeed, viewed historically Japan fared well by emphasizing cooperation
and market allocation over free competition: see Schaede (2000), 74.
37 Gao (1997), 185, notes that the rejection of the profit principle inherited
from the war days was still regarded as conflicting with the national interest to
build up strategic industries, the companies of which were required to invest more
and pay out less in dividends.

of 194649.38 Given the strength of the bureaucracy39 and the Marxist

orientation of high-ranking economists,40 large firm preferences expres-
sed through the keidanren, the dissatisfaction of foreign investors and
the obstacles the presented for the inflow of foreign capital which was
desperately needed for the rebuilding of the Japanese economy, led to a
reorientation of SCAP policies.41 Certainly, there were other contribut-
ing factors such as the dim prospects of China falling to Mao Tsu Dung,
which led to a pressing re-evaluation of Japans position as a strong
ally, roaring Republicans and US enterprises expressing serious doubts
regarding the socialist actions undertaken by SCAP42 and, last but not
least, Americas rapidly depleting willingness to finance Japans devel-
opment.43 Starting in as early as 1948 Japanese firms took advantage of
these circumstances and pushed for an AML revision, which was finally
promulgated in 1949.44
In the course of this revision, the prohibition of inter-corporate stock-
holdings and multiple directorates was revoked and substituted by an
allowance provided the position was not obtained by unfair methods of
competition, or had the effect of reducing competition in any particular
field of trade or between companies.45 The permission requirement of
mergers or acquisitions was substituted by a 30-day ex ante report require-
ment for those endeavours that were not forced by unfair methods of
competition or by disparities in bargaining power.
Similarly, the permission requirement of international agreements was
substituted by a 30-day ex post report requirement in order to facilitate
the influx of both foreign capital and technology46. The changing of
38 See Gao (1997), Chapter 4, for an evaluation of the priority production
system, particularly p. 132.

39 See Hata Ikuhiko, Japan Under the Occupation, (1976) The Interpreter,
10, 373, who states never has the Japanese bureaucracy exercised greater author-
ity than it did during the occupation, in Johnson (1982), 176.
40 Gao (1997), 613, describes the Marxist orientation of Japanese economists.
41 See Bisson (1954), 187 ff; Schaede (2000), 76.
42 As Buckley (1999), 23, and Yamamura (1967), 34, note, SCAP had lost
much of its authority by 1947.

44 Law No. 214, promulgated on 18 June 1949.
45 This part is based on Headley (1970), 198 ff. See also Pape (1979), 465.
46 Johnson (1982), 223, states that the most serious problem with the original
AML was its ban on agreements that provided for the exclusive use of technologies
of know-how. He continues, quoting SCAP, that such a proposal represented
advanced antitrust thinking. The reader is referred to Supreme Commander
for Allied Powers (1951). Japan may have been suffering from a technological
backblock as a result of the isolation of Japan from foreign technology during the

Appendix 3 261
the ex ante review of security acquisitions to an ex post review had the

positive economic effect of removing the bureaucratic delays and costs
associated with business transactions, while placing the burden of proof
to repeal concluded transactions on the Commission, which now required
considerable evidence to establish a substantial lessening of competition
or a substantial restraint of trade.47 Bisson48 states that the revision
twisted49 the term competition and potential competition by incorpo-
rating the terms same customers and same suppliers which, in effect,
offered firms a familiar way to circumvent prosecution by claiming to
serve different markets.50
A further point which deserves particular mention from an economic
perspective is the reduction of the structural control character of the
AML. By eliminating Article 8, the JFTC was deprived of its most potent
tool to order those companies which commanded over an undue imbal-
ance in business powers to disinvest.51
The reform of 1949 marked the ending of both the strong enforcement
period of the AML and the conducive pressure on the JFTC to vigorously
enforce the law as was formerly exerted by the SCAP.52 The support the
amendment received from both the American public and private sector
nurtured the widely held suspicion among the Japanese that the AML
impeded economic recovery.53 Indeed, this view was so widely spread
to even include JFTC civil servants who regarded the amendments to
be improvements that would enhance the inflow of foreign capital and
lead to a relaxation of unnecessarily severe mechanical prohibitions.54 As
period from 1931 (Manchuria) to the beginning of the Korea boom in 195051. See
also Iyori, Uesugi and Heath (1994), 10.
47 This passage is partly based on Bisson (1954), 187 ff, who gives the most
complete account of this aspect.

48 Bisson (1954), 188 ff, and Yamamura (1967), Appendix IV, 197.
49 Twisted is an accurate term in the sense that it can be assumed to run
counter to the original intention of the AML; however, taking into considera-
tion that neither competition nor potential competition have properly been
defined, and its meaning was bestowed by determining suspect competitive behav-
iour, this term lacks precision.
50 This point is raised by Eleanore M. Hadley, Japan: Competition or Private
Collectivism?, Far Eastern Survey, 18 (25) (14 December 1949), 293, in Bisson
(1954), 189.
51 Mitsuo Matsushita (1993), 78; though the direct economic consequence of
this Article was nil for it has never been invoked. See ibid., 80 and 83.
52 See Mitsuo Matsushita (1993), 79.
53 See Headley (1970), 11.
54 JFTC Annual Report 1952, 16, in Yamamura (1967), 31.

Johnson55 notes, the relaxation of the AML liberalized the provisions cov-
ering patent and exclusive agent contracts and permitted the acquisition of
stocks for foreigners, and thus aided the recovery process of the Japanese
economy.
Under the influence of the Korean War (195053), America changed
its attitude towards Japans political role and started to draw back from
its influential position. As it became apparent that SCAPs new leader-
ship was more lenient, a governmental Legal Inquiry Council drew
up amendments to the AML, which would ultimately be frustrated by
SCAP in late 1951. When SCAP withdrew from overseeing the activities
of JFTC and Japanese civil servants took over, enforcement activity
declined sharply.56 While 69 cases were investigated, only 14 ended
with an inconsequential warning; the others were dropped for lack of
evidence57 and uncertainty regarding public interest.58 Clearly, the
reorientation of the American purchasing policy of war materials in
1951 brought the uncompetitive leather, rubber and textile industry
into economic distress and allowed MITI to seize the momentum to
use its political power to weaken the JFTC by applying administrative
guidance:59 it gave production curtailment recommendations (kankoku
stan), which were readily followed60 by the industry.61 The JFTC
was strongly opposed to two of the three industries,62 and to two
55 See Johnson (1982), 223 ff.

56 See Schaede (2000), 78.
57 This is particularly interesting since the per se illegality of cartels was still
in place.
58 As outlined by AML 1947, Art. 2.7. See Schaede (2000), 78. H. Misonou
(1987), Nihon no dokusen kinshi seisaku to sangyou soshiki (Japans Antimonopoly

Policy and Industrial Organisation), Tokyo: Kawade Shobou Shinsha, 4850,
argues that indications of the new posture of the JFTC were contained in the
JFTCs annual report of 1951, which stated that legal measures should be avoided
if they were not in the public interest or if they would result in economic injury for
the firms involved in a violation; in Beeman (1997b), 40.
59 Johnson (1982), 224, states: Despite the major unsettling effect the reduc-
tion of US procurements had on several industries, and disregarding all fears that
the termination of the Temporary Materials Supply and Demand Control Law
in April 1952 would lead to further destabilisation of the economy, the Yoshida
government and SCAP were both determined to let it elapse. Thus these actions of
MITI constitute the first action as an independent ministry.
60 Uriu (1996) maintains that industry preferences were determinantal for
policy outcomes.
61 This passage is based on Yamamura (1967), Chapter 3.
62 After the 1953 revision of the AML, the cotton weaving industry was
granted a recession cartel status (24-4 AML) while the leather industry was

Appendix 3 263
more that were to follow during the post-Tokujyu-demand-push-boom-

recession on the grounds that extra-legal advice63 could not constitute
a cartel exemption.64 The issue was resolved after the Peace Treaty of
San Francisco came into effect (in April 1952) and SCAP had been
abolished, by giving MITI the right to create cartels among small and
medium-sized enterprises (SME) as exceptions to the AML.65 Yet
pressure for amending the hated66 AML continued to increase as
the economic situation deteriorated. In the 1953 amendment the JFTC
compromised on several points in the hope that this would make any
further changes obsolete.67
The revision related to the following eight juridical changes.68 Their
economic implications will be discussed in turn.
Stockholding regulations were relaxed.69 An increase in the share-

holding limits paved the way for the formation of keiretsu and ver-
tical corporate groups70 and enabled banks to become the largest71
shareholders in companies.
allowed to maintain prices under a rationalization cartel (24-3 AML). See

Yamamura (1967), 60.
63 Kankoku stan is a form of ministerial guidance based on administrative
guidance; it is thus not an official, but an indirect action. MITI claimed that as it
was not a legally enforceable action, it could not violate the AML. See Schaede
(2000), 82.
64 Iyori, Uesugi and Heath (1994), 10.
65 See Johnson (1982), 225. The laws that were passed were the Special
Measures Law for Stabilization of Designated Medium and Smaller Enterprises

(No. 294 of August 1952) and the Exports Transaction Law (No. 299 of August
1952).
66 See Headley (1970), 11; Mitsuo Matsushita (1993), 70; and Beeman (1997b),
40 and elsewhere.
67 Misonou, above note 58, 7788, in Beeman (1997b), 42. Also Schaede
(2000), 80.
68 The following is predominantly based on Yamamura (1967): see
Chapter4and Appendix IV for a comparison of the 1947 and 1953 versions of

the AML.
69 Interlocking directorships, mergers and mutual stock holdings were allowed
except in the case of holding companies (Art. 9), financial institutions (sharehold-
ing limit was increased from 5% to 10%: Art. 11.2) and if they constituted a sub-
stantial limitation to competition. The stipulation that these were not attained by
unfair methods of competition was erased.
70 See Schaede (2000), 80.
71 Since the AML does not forbid different financial institutions each having
a 10% share in a company, bank sector influence may be even higher: see Headley
(1970), 279 and Table 12-7.

Retail price maintenance (RPM)72 was admitted.73 It embraced

books, magazines, and other published materials and objects which
were covered by copyright law.74 Similar provisions exist in other
countries and allow for the generation of economic profit from
investments with a public interest character.
Unfair competition was redefined.75 Schaede views this redefini-
tion as a potential weakening of the AML, arguing that it made
it more difficult for the JFTC to establish unfair trade.76 Yet,
generally speaking, the purging of a public interest criterion by
replacing it with a more precisely defined regulation is desirable
from an economic point of view as it mitigates legal, and thus
business, uncertainty. To the extent that enforcement is politically
motivated, the strengthening77 of the Act perceived by bringing the
broader concept of unfair business practices within the AML is but
a farce.
Prohibitions on the establishment and membership of a monopo-
listic organization78 were eased by allowing control associations;
72 It should be noted that retail price maintenance (RPM) has both a horizon-
tal dimension if it relates to collective action (cartels) and a vertical dimension if
it relates to abuse of dominant position. Since the Shinbun Hanro Kyotei decision
of the Tokyo High Court of 9 March 1953 (in Kosaiminshu 6 (9), 435 et seq., in
Mitsuo Matsushita (1990b)), in which it was ruled that the mutual restriction
criterion of Art. 2(6) was logically separable from a unilateral restriction, as
existed under resale price maintenance, this unruly practice was classified as a
vertical arrangement and thus as not relating to cartels; thus implying that Art. 3
cannot be invoked but only Article 2.9(5), designation 12 on RPM (as amended
in 1982). The requirement to detect coercion and the inability to take more severe
measures than cease and desist orders undermines the applicability of Article
2.9(5) and sheds doubt on effective RPM deterrence. Since it appears that SME
are largely exempted from the AML, they are not exempted from RPM since their
exemption is based on stabilizing and rationalization cartels and are subject to the
ministers concerned of the relevant institution. See Iyori, Uesugi and Heath (1994),
132. In Japan RPM is held to violate the act if it tends to impede fair competition:
see Negishi (1984), 33.
73 If it was designated by the JFTC and if the item was not used on a daily basis
by the general consumer.

74 See Headley (1970), 199.
75 The public interest criterion of Art. 2.7 was deleted. Unfair business
practices were established in the presence of unjust discrimination, undue prices,

coercion to deal, unjust restriction of business activities, unjustly abusing its posi-
tion, and unjust interference with ones competitors in Japan.
76 See Schaede (2000), 80.
77 See Mitsuo Matsushita (1993), and Iyori, Uesugi and Heath (1994), 11.
78 Art. 5 of the law was deleted. See Haley (1998), 894.

Appendix 3 265
thus, in effect, this constituted a loophole in the formerly established

illegality of monopolistic and monopsonistic organizations.79
The prevention of substantial disparities in bargaining power80 was
revoked. Industry concentration potentially increased since large
firms could now become dominant market leaders without having to
fear the JFTC. Though the consequences of its deletion should not
be overstated as it has never been invoked and, given the deconcen-
tration and reorganization measures taken in the preceding years, its
actual applicability was probably limited.81
The Trade Association Act was abolished. This change was prob-
ably more of a cosmetic nature, since most of its force had been
dismantled earlier82 and had cleared the way for a revival of coop-
eration within trade associations.83
Unreasonable restraint of trade was redefined.84 This broaden-
ing of terms can also be judged to be a loss of precision with its
associated negative effects on prosecution and the alleviation of self-
regulation obstacles.85
Recession and rationalization cartels were admitted. The per se
illegality of cartels was substituted by a rule of reason that
distinguished between good and bad cartels between those
cartels that were based on a governmental licence and those that
were not. Cartels were allowed if they did not substantially restrain
competition in a particular field of trade and when they were
licensed with the JFTC.86 Recession cartels (Article 24.3 AML)
constituted a temporal exemption while rationalization cartels
(Article 24.4 AML) were exempted for capacity adjustment.87
79 See Yamamura (1967), 10.

80 This Art. 8 was heavily criticized by big business.
81 See Mitsuo Matsushita (1993), 80. He further states that it was re-
introduced in a different formula in the 1977 amendment.

82 In the amendment of 1952, the Trade Association Act was reduced to a
restatement of what fell within Article 4 of the AML. See Yamamura (1967), 54.
83 Schaede (2000), 80.
84 The former Art. 4 specifying that entrepreneurs were not allowed to agree
with other entrepreneurs on price and output, restraint of technology and invest-
ment, was eliminated for it fell under interpretation of Art. 3 covering monopoliza-
tion and unreasonable restraint of trade.
85 This is postulated by Schaede (2000), 80 ff.
86 Mitsuo Matsushita (1993), 79 ff.
87 Ueno (1980), 393, notes that recession and rationalization cartels were
mainly found in textiles, iron and steel, chemicals, and petroleum products benefit-
ing large businesses.

Schaede88 argues that this generated two important loopholes: the

first regarding the difficulty to establish significant restraints of
competition; the second one regarding a public interest criterion
in terms of economic growth. Despite MITIs plea, the JFTC
retained the power to license cartels, but it should prove to be a
pyrrhic victory.
The 1953 amendment constitutes a significant weakening of the enforce-

ment capacity of the AML, at least when measured against the original
spirit of the law. The initial hopes of the JFTC to prevent future amend-
ments and minimize outside pressure were not fulfilled for it saw the
seeds of future conflict with MITI over the issuing of cartel licences.
The strengthening of control over unfair business practices, which now
embraced abusive conduct by large towards small enterprises, has contrib-
uted to the judgment that the reforms constitute a japanification of the
AML law.89 While Gao90 states that, even after its revisions of 1949 and
1953, the AML was stricter than competition laws in European countries,
I personally would be more critical in so far as any legal text is to be meas-
ured by its interpretation and application rather than by its exact wording.
The reforms of 1949 and 1953 not only took many of its effective enforce-
ment tools out of the legislation but, and perhaps even more importantly,
it drove the JFTC into the defence and left it struggling for its survival.91
Perceivable support for the AML was low from the beginning except for
the dissolution of the zaibatsu and the restrictions placed upon holding
companies.92 Reasons include the view that the AML was an obstacle to
economic growth,93 the general publics perception that cartels did not
constitute a grave criminal offence,94 and the mediocre political support
it enjoyed.95
88 See Schaede (2000), 81.

89 This is propagated by Mitsuo Matsushita (1993), 81, and Iyori, Uesugi and
Heath (1994), 12.
90 Gao (1997), 271.
91 See Beeman (1997b), 41. Haley (1998), 894, describes this period as the high
watermark of effective antitrust opposition.

92 Yamamura (1967), 910; Headley (1970), 3723; Bisson (1954), Chapter 9.
93 See Yamamura (1967), Chapter 4.
94 Beeman (1997b), 62.
95 Beeman (1997b), 41, states that the conservatives were generally hostile,
while the socialist and communist groups saw the AML as an American tool to
subdue Japan and the inherent dangers of monopolization could not be over-
come by it; the generally supportive social democrats were weak and fractioned,
were not convinced of the legislations effectiveness and demanded several AML

Appendix 3 267
Viewing MITI and the JFTC as antagonists, Johnson notes96 that a

major significance of the 1953 AML reform was that it almost marked
the completion of MITIs industrial policy tools which contributed to the
poor AML enforcement record in the years to come. In keeping with this
finding, I would interpret, as an indication of dormant antitrust enforce-
ment and political vulnerability of the Commission, (i) a rapid decline in
the number of new cases identified by the JFTC, (ii) a declining number of
cases where full adjudicative procedures were taken, and (iii) an increase
in the number of cases carried over to the following year during the period
195360.97 Even though the basic enforcement framework remained
intact, the political environment surrounding the JFTC often made
obtaining true functional independence problematic, although not entirely
impossible.98 Matsushita99 argues that the JFTCs focus on abusive
conduct between large and small enterprises better reflected the needs of
society, while Yamamura100 speaks of an emancipation of the law from
the incongruence of SCAPs policy with the rapid growth the Japanese
government desired. Regarding the political dimension of the 1953 revi-
sion, Yamamura101 notes a clear signalling effect that industry could
depend on the government to promote their drive for increased investment
for it was, after all, interpreted to be in the best national interest.
3. DEVELOPMENTS BETWEEN 1954 AND 1958
In the aftermath of the 1953 reform, the emasculation of the AML contin-
ued. The Japanese economy was over-heating (kanetsu)102 while exports
and domestic demand were low. In order to mitigate the 195354 reces-
sion and the heavy dependency on world prices of the economy, MITI
attempted to strengthen national competitiveness by eliminating excessive
exemptions. Yamamura (1967), 55, states that the socialists and labour unions
half-heartedly opposed the AML amendments while SME and consumer groups
fiercely opposed them.
96 Johnson (1982), 227, states that MITI had foreign exchange, foreign
capital, cartels, banking keiretsu, industrial location, and direct government

finance, plus the whole range of activities of the Industrial Rationalisation Council
under its influence.
97 Data based on Misonou, above note 58, 83, in Schaede (2000), 91.
98 Beeman (1997b), 61.
99 Mitsuo Matsushita (1993), 81.
100 Yamamura (1967), 53.
101 Ibid., 61.
102 Ibid., 55.

competition (kodo kys) and to develop potent firms in strong strategic

industries which would be able to compete internationally.103
To overcome establishment and enforcement costs associated with
cartelization,104 MITI used extra-legal ministerial recommendations based
on administrative guidance to promote economic growth.105 If challenged
by the JFTC, MITI would claim that the actions taken were emergency
measures, based on extra-legal administrative guidance, and thus did not
constitute a violation of the AML. It threatened that the JFTC would be
to blame for a deepening of the ongoing recession106 or, just as innova-
tive, the Ministry would claim that parallel firm behaviour was not based
on collective action but on unilateral orders issued to each company.107
Contrasting the last point made, Uriu108 claims that often the industries
initiated agreements and MITI simply ratified them. Though kankoku
stans could be legally challenged109 by the JFTC, they had the advantage
of avoiding highly bureaucratic application and filing procedures as were
required for JFTC licences. Furthermore, they were enforceable by coerc-
ing firms to comply and by establishing effective foreclosure monitoring,
making them easier to apply than recession or rationalization cartels.110
The JFTC eventually decided to avoid formal action against kankoku
stan cartels, noting that MITI did have the right and jurisdiction to
undertake orders as administrative measures.111 The JFTCs response to
the increasing external pressure was the more flexible application112 of
the AML. This certainly served its self-survival but the ambivalence of the
enforcement it generated undermined its credibility.
By 1955, the AML was no longer a major force and the rule of the
government and the Liberal Democrat Party (LDP) was secured.113 The
government reoriented its policies114 towards an export-oriented inde-
103 See Gao (1997), 183.

104 See Martin (1994), Chapter 6 for a discussion.
105 For elaborate references to the kankoku stan see Schaede (2000), 82;
Yamamura (1967), 66; Iyori, Uesugi and Heath (1994), 12.

106 Thus further endangering its already weak position by causing negative
publicity.
107 See Schaede (2000), 83, and Beeman (1997b), 44.
108 See Uriu (1996).
109 Schaede (2000), 90, notes that kankoku stan of the 1950s and early 1960s
have never been officially exempted from the AML.

110 See Schaede (2000), 84.
111 See Misonou, above note 58, 613, in Beeman (1997b), 44.
112 See Schaede (2000), 90.
113 See Yamamura (1967), 62.
114 After the war, the Japanese economy shifted from an inward orienta-

Appendix 3 269
pendent economy. Theoretical legitimization was based on Schumpeters

idea of innovation, which translated into a practical strategy to advance
economic structure115 and Japans position in international competition.
It was within this framework that MITI and other ministries started to
expand their power base, and began to initiate specific industry laws116
which amounted to de facto amendments of the AML. The majority of
laws were passed between 1952 and 1960 and included sectors as diverse
as coal, textile, machinery, ammonium sulphate, fisheries, agriculture,
fertilizer, liquor, beauty salons, dry cleaners, insurance, trust banking,
warehouses and transport by road, air and sea.117 The majority of
cartels118 were exempted under the Export and Import Trading Act and
the Small and Medium-Sized Enterprise Stabilization Act. The former
related to import and export (dumping) cartels and the latter to recession
cartels. Because of their importance, these two Acts will be considered in
more detail.
The first law to be discussed is the Export and Import Trading Act.
By the end of 1953, when SCAP had left the country, the Export Trade
Law was finally119 amended and renamed the Export and Import
Trading Act; it authorized dumping,120 as well as price and quantity
cartels of imported goods121 in order to improve the balance of payments
tion towards an outward orientation, marking the beginning of the ideological

transition of Japanese developmentalism from the managed economy toward the
trade version: see Gao (1997), 192. Building upon this transition, Prime Minister
Yoshida Shigeru, an adherent of progressive nationalism, led Japanese develop-
mentalism towards a decisive transition from a military version to a trade version
by rejecting re-armament and propagating his five-year plan for economic inde-
pendence: Gao, ibid., 195 and 207. This plan sought to achieve independence by
increasing the balance of payments and to achieve full employment. For a detailed
discussion see Gao, ibid., 198212.
115 As described in the 1957 MITI White Paper on Industrial Rationalization,
translating innovation into a detailed industrial policy concept. See Gao (1997),
209.
116 This passage is based on Yamamura (1967), who presents the best represen-
tation of the laws and associated cartels in Chapter 4 and particularly Table 6, 64 ff.
117 See Beeman (1997b), 43; also Yamamura (1967), 62 ff.
118 As of 1957, out of 149 cartels cited in the JFTC Annual Report of 1957,
478 (in Yamamura (1967), 645), 89 were based on the Export-Import Trading
Act, while 41 where based on the Small and Medium-Sized Enterprise Stabilization
Act.
119 An earlier attempt in 1948 had been frustrated by SCAPs strong objec-
tions: see Yamamura (1967), 46.

120 Yamamura (1967), 63, speaks of price differences of between 20% and 30%,
allowing firms to increase exports by cross-subsidization.

121 Yamamura (1967), 60.

condition. The 1955 amendment reduced JFTCs consenting clause

to cartels to a mere consultation and with regard to export cartels to
a pre-notification, thereby reducing official control to a minimum.122
MITIs extension of the law to domestic price agreements and cartels
considerably undermined effective antitrust enforcement.123 Schaede124
cites several consequences. It did not only constitute a loophole in the
AML but also channelled international operations through export asso-
ciations, which facilitated cooperative behaviour between competitors
and thus contributed to a long-run propensity to cooperate. It served to
promote quality improvements and the setting of standards and, because
of MITIs inability to control the actions of export associations abroad,
it also contributed to the associations increasing independence and
self-regulation. Dick presents empirical evidence that in those export
industries where cartel effects could be established, the cost reduction
(a significant price effect) and the quality assurance (a significant quan-
tity effect) hypothesis was confirmed, while finding little proof for the
hypothesis that export cartels enable firms to exploit their market power
in overseas markets.125
The second law to be discussed is the Small and Medium-Sized Enterprise
Act. Politicians fearing for their electoral votes started to support SME
as early as 1949 to facilitate cooperation between them. The Small and
Medium-Sized Enterprise Stabilization Act of 1952, which allowed MITI
to exempt SME from antitrust legislation in order to foster coopera-
tive market behaviour,126 was amended in 1955 to ease cartelization by
reducing the power of the JFTC.127 The importance of the SME sparked
from their position as subcontractors and small-scale producers and the
difficulty of enforcing stable cartels in those industries. The amalgamation
of the 1949 and 1952 laws into the Small and Medium-Sized Enterprise
Association Law of 1957 allowed the establishment of recession cartels
consisting of small enterprises that would be exempted from the AML.128
122 Ibid., 62. Haley (1998), 895, identifies it as an elimination of all but a
formal vestige of JFTC authority.
123 Schaede (2000), 87.
124 Ibid., 88.
125 His assessment that the JFTCs contemporary revision of its enforcement
practices in the context of the Structural Impediments Initiative is unnecessary is

to be regarded critically if one allows for export cross-subsidization (dumping). See
Dick (1992), 27598, particularly 291.
126 See Schaede (2000), 89.
127 Yamamura (1967), 62.
128 Schaede (2000), 89.

Appendix 3 271
Particularly notable was the reintroduction129 of the two thirds rule,

which stated that if two thirds of small-sized firms in an industry applied to
form a cartel, the Ministry could order all firms in the industry to observe
the restrictions and instruct firms to join the association.130
By 195758 the general economic situation had worsened, aggravating
inventory accumulation that could not be mitigated by the sluggish exports
or domestic demand. When, in 1957, MITIs proposals for supporting the
chemical and iron and steel industries encountered strong opposition from
agricultural groups and the Liberal Democrats, it pushed for a full-sized
attack on the AML. The dismantling reform plans, drawn up by a cabinet-
level deliberation council,131 envisaged cartels to overcome structural prob-
lems, planned investment to prevent overcapacity, to stabilize long-range
supply and demand and to solidify the promotion of exports.132 Ministries
should handle both cartel applications and registrations and pass them on to
the JFTC, which would only disallow them if they were contrary to public
interest.133 Fierce opposition came not only from agriculture groups, con-
sumers, small and medium-sized enterprises,134 trade unions and socialists,
but also from the Zaikai themselves, particularly in the financial sector and
the steel industry,135 who feared increasing government interference.136 Since
the topic was so controversial137 and the economy was becoming stronger,138
the government decided not to bring it to a vote but to proclaim the National
Income Doubling Plan139 to underline the newly gained optimism.
Certainly, the period of the 1950s was one of clear domination of
industrial policy and large business interests. Particularly in the early
129 Dating back to the 1884 Regulations for Local Trade Associations and the
1931 Important Industries Control Law.
130 Schaede (2000), 89.
131 See Johnson (1982), 226.
132 Yamamura (1967), 71 ff.
133 Misonou, above note 58, 1078, in Beeman (1997b), 46. Haley (1998), 896,
notes that this proposal was very much in the tradition of the 1955 Export and
Import Law amendment in the sense that authority to grant exemptions to the
AML would have been transferred from the JFTC to MITI.
134 See Beeman (1997b), 46.
135 See Schaede (2000), 94.
136 Yamamura (1967), 734.
137 Kanazawa Yoshio (1963), 490, believes that the bill would have been
enacted had it not been for the major and quite time-consuming disruptions that
the Police Duties Execution Bill had caused in the Diet.
138 The Iwato boom (195962) had begun. See Johnson (1982), 226, and
Sheridan (1993), 141 ff.

139 Adopted in December 1960, it was soon widely over fulfilled: see Sheridan
(1993), 146 ff.

years, it became apparent that business could depend on the governments

support140 regarding the promotion of their interests since it was their
strength and international competitiveness on which social welfare and
Japans future should be built. The position of the JFTC during this decade
is comparable to a vicious circle. Lacking strong public support, the JFTC
was not in a particularly good position to enforce the law, thereby frustrat-
ing favourable stakeholders and thus further undermining its own position.
By the same token, the lack of public support led to the paradoxical situ-
ation141 in which the JFTC had reason to fear that strict enforcement of
the AML would lead to the enactment of further specialized industry laws
exempting whole sectors from the AML. The Commissions struggle for its
survival is reflected in its poor enforcement statistics. Not only did the total
number of cases brought by the JFTC decline rapidly but, in particular, the
number of cases initiated by it had declined to virtually zero in 1959. Over
the same period of time full adjudicative procedures undertaken declined
rapidly and remained at zero from 1957 to 1960. Enforcement partly
shifted to formal recommendations but most of the cases, more than 80 per
cent, were dropped for insufficient evidence or carried over to the following
year, further underlining the Commissions indecisiveness.142
The enforcement record sheds doubt on Beemans143 finding that the
participation of a ministry was a necessary condition for the JFTC not to
act against cartels and that a two-tier economic system one accountable
to the AML, the other not accountable to it had emerged. Rather, the
JFTC was playing for keeps, hardly daring to take any action. By 1960
cartels had become a prominent feature of the economy.144 Underlining
the cartel mindedness145 of the Japanese economy, MITI and the Japan
Productivity Centre claimed that Japanese industries could cut produc-
140 Yamamura (1967), 61.

141 See Beeman (1997b), 47.
142 This passage is based on JFTC 1977: 3567 data in Misonou, above note
58, 83, in Schaede (2000), 91. Also see Kanazawa Yoshio (1963), 505 ff.
143 See Beeman (1997b), 44 and 48.
144 A particular example of the JFTC bowing to political pressure is cited
by Schaede (2000), 92 ff. A price-fixing case involving parallel behaviour of 30

newspapers on 1 April 1959 had to be dropped because there was insufficient evi-
dence that the companies had been coerced into increasing prices. This did not
only shatter consumers trust in the Commission but also led to a large number
of price agreements established by trade associations. De facto cartels or large
oligopolies (implicit price leadership agreements) included, among others, the fol-
lowing industries: copper, aluminium, nickel and most other non-ferrous metals,
soda and ash soda, benzol, auto tyres, chemicals, pharmaceuticals and rubber.
145 A central point in Schaedes argument: see Schaede (2000), 90.

Appendix 3 273
tion costs by rationalizing, thus implying larger scale production, and

gain international competitiveness.146 Though contrary to the perceived
intention, but not entirely unexpected, it protected the cartels learning
potential and led to a tendency of generating more elaborate control
mechanisms and widening the scope of agreements.147 This, in effect,
perverted the underlying social welfare argument into a situation where
industries suffering from overcapacity increased their production through
mere opportunism148 and the fear that they would be out-rationalized.149
4. ANTITRUST LEGISLATION IN THE 1960s (195970)
In the presence of rising prices and consumer dissatisfaction, politicians

sought stronger competition law enforcement.150 Not only were domes-
tic scholars151 very much in favour, but also foreign pressure152 became
strong in 1959. The latter was linked to the huge trade surplus with the US,
the IMF pushing Japan to move to Article 8 status (no capital controls),
which it eventually agreed to in 1964, and GATT exceeding coherence
with Articles 11 (no trade controls because of balance of payments defi-
ciencies) and 14 (no governmental subsidies for exports).153
From MITIs point of view, liberalization undermined its raison dtre,
curtailed its means to influence industries154 and threatened to accentuate
146 Headley (1970), 391, points out that inasmuch as efficiency is uncritically
associated with larger and larger firms size, there tends to be the view that the
higher the market concentration, the greater the effective use of resources.
148 This suggests rational behaviour of profit-oriented actors in an environ-
ment with changed economic rules. See Frank (1997), 414, on the gold-plated
water cooler effect, and Cullis and Jones (1998) on X-inefficiency.
149 See Yamamura (1967), 77 and Chapter 6.
150 The Social Democrats, in particular, saw the major reason for prolonged
and rising inflation in the high degree of market concentration (monopolization)

of the Japanese economy and pushed for vigorous AML enforcement: see Mitsuo
Matsushita (1993), 812, and Yamamura (1967), 82.
151 Iyori, Uesugi and Heath (1994), 13, state that young scientists were inspired
by the American as well as German approach to a market economy. Yamamura

(1967), 82, cites H. Misonou, Han-Dokusen no Tachiba yori (From the Anti-
Monopoly View), A Reorganization of Industrial Structure, 91, as being in favour
of a strengthened AML.
152 President Eisenhower was determined to defend the dollar, a policy contin-
ued by the Kennedy administration: see Johnson (1982), 250.

153 For a detailed discussion on this point see Gao (1997), 2636.
154 For example, by taking away the intuitive rational of a managed economy,

the structural flaws of the system it had created.155 Patriotic fear that foreign
firms, larger and controlling vast amounts of capital, would buy out
Japan accompanied discussions on liberalization. Excess competition156
and rising over-investment to obtain imported raw materials or subsidies157
led MITI to press for more extensive powers beyond foreign currency and
raw materials allocation;158 investment control was the declared goal. In
1960 the outgoing Kishi cabinet adopted plans for rapid and substantial
trade liberalization.159 The Ikeda government, which followed, took several
steps to mitigate the rapidly developing crisis atmosphere:160 one of the
measures adopted was the famous income-doubling Plan.161
Beginning in 1961, MITI started to reorientate162 and to propagate a
by reducing the number of commodities falling under the import quota system, by
abolishing the foreign exchange control law, which was used to provide firms with
the much needed foreign currency allocations, and by easing the foreign invest-
ment law regulating foreign direct investment and foreign technology licensing: see
Mitsuo Matsushita (1993), 82. Also Gao (1997), 228.
155 See Johnson (1982), 249.
156 MITI viewed enterprises to be investing heavily in order to undercut com-
petitors prices only to find themselves suffering from over capacity.

157 Johnson (1982), 250, states that this was particularly true for the textile indus-
try. Apparently, the underlying assumption is that raw materials and foreign capital
allocation was based on production capability, creating a vicious cycle of positional
investment incentives which were bound to lead to X-inefficiency. Yamamura
(1967), 77, describes this notion as fear of being out rationalized. Yet he identi-
fies production cost (presumably lower for new equipment), demand fluctuations,
anticipated rising domestic and foreign demand, and MITIs market share allocation
based on capacity ratings as reasons for rising investment and the unworkability of
effective industry self-restriction (self-regulation). See also Yamamura (1966), 455.
Murakami and Yamamura (1982), 113, argue that the actions of Japanese firm were
based on market share maximization rather than on profit maximization.
158 Headley (1970), 400 and 406, lists the following ways to influence industry:
lending from Japanese government sources, tax favours, exchange controls (until
1964), approval of capital imports, validation of technological agreements and
administrative guidance, and amortization.
159 Johnson (1982), 251, states that industries should be successively liberalized
to reach an 80% rate of import liberalization within three years.

160 Johnson (1982), 251 ff; these actions included the founding of institutions
with the objective of promoting exports: namely the Asian Economic Research
Institute (1960), the Overseas Economic Cooperation Fund (1961) and by provid-
ing more capital for the private sector via the Export-Import Bank.
161 Adopted in December 1960, it was soon widely over fulfilled. See Sheridan
(1993), 146 ff.

162 Iyori (1986), 57ff, states that MITI acknowledged the need for AML to
protect the functioning of competition and to stimulate efficient industrial activity,

to stimulate creativity and innovation of enterprise and, furthermore, accepted that
the Japanese economy is based on recognition of the fact that free enterprise is

Appendix 3 275
new industrial order, which was designed to overcome the three pressing
economic problems identified by the Ministry: the small-scale industrial
production, the large number of companies, and the numerous entries
and exits of enterprises.163 Reviewing the problems perceived by MITI, it
becomes apparent that the Ministry was still emphasizing concentration
and less competition over a free market approach to the national economy.
Countering the dual threats of market liberalization and higher imports,
increased productivity and a re-ranking of designated growth industries
was to be accomplished by (i) administration by inducement,164 (ii) finan-
cial support, and (iii) cooperation between government and private sector,
known as cooperative regulation (kyd chsei), to set output levels.165
The Special Industry Promotion Temporary Measures Law of 1963
(tokutei sangy shink rinji sochi h) should allow MITI to compensate for
the loss of its powers of control over foreign capital by creating a single
law, which would bypass the AML, to manage industry output via cartels,
mergers and intra-firm cooperation.166 Liberalization policy, jurisdictional
disputes between MITI and the Ministry of Finance, disputes regarding
the future of the AML, the debate over excess competition, factionalism
within the LDP and the battle within MITI over the appointment of its
deputy minister led to its downfall in the Diet.167 Keidanrens position
was an uneasy one. On one hand it favoured government involvement in
those cases where the independent industrial integration process was not
working, while fearing the loss of its freedom through excessive govern-
ment interference. The trade-off between exchanging JFTC emasculation
for MITI emancipation did not appear to be particularly desirable.168
In October 1964 simultaneously with the acceptance of Japans new
the motivating force for industrial creativity and innovativeness. Johnson (1982),
257, describes the industrial development of what the Japanese termed mixed
economy (kong keizai) as paralleling the French concept of conomie concerte,
which would indeed be quite separable from the Japanese concept of free
economy (jiy keizai) of the immediate post-war period. See Gao (1997), 185.
163 See Schaede (2000), 95.
164 While Schaede (2000), 95, refers to it as industry self-regulation in trade
associations, Johnson (1982), 256, describes it as a concerted action of bureaucrats,

industrialists and financiers to set investment rates, discuss mergers and foreclosure
all with the acknowledged objective of building a new industrial structure.
165 See Schaede (2000), 95, and Johnson (1982), 256.
166 Ueno (1980), 390, laments that there was no basic law that outlines the
conception of industrial policy for the sake of sophisticating the industrial

structure but that this law (as well as the Measures for the Promotion of the
Conversion of Industrial Structure Bill of 1974) was approaching it in spirit.
167 See Johnson (1982), 25563.
168 See Gao (1997), 228, 2726.

international obligations the recession, which first appeared to be a cyc-

lical downturn caused by a balance of payments crunch and government
controls on credit, evolved to become the worst post-war recession.169 To
overcome the structural distortions, MITI was allowed to implement
much of what it had proposed in the legislation of 1963. MITIs invest-
ment coordination cartels170 (tshi chsei karuteru) and large mergers
were interpreted as being in the public interest and, as such, not to be
challenged by the JFTC. Among other industries, investment harmonizing
agreements171 were formed in petrochemicals, synthetic textiles, acrylic
fibres, paper pulp and ferro-alloys. The investment cartels became the third
road to bypass the AML and made kankoku stan obsolete. They were
officially abolished by a cabinet order that all existing kankoku stan were
to be transformed into formally JFTC-licensed and thus AML-exempted
investment cartels.172 This policy did lead to an increased number of cartel
exemptions with a perverse impact on consumer prices.173 Large mergers
that were promoted174 included the merger of Mitsubishi Heavy Industry,
New Mitsubishi Heavy Industry and Mitsubishi Shipbuilding in 1964,175
of Nissan Automobile and Prince Automobile in 1965 and of Yawata Iron
and Steel and Fuji Iron and Steel in 1970.
While mergers had been on the rise since 1954, their negative anticom-
petitive effect was expectably low, yet the 1960s presented a different
situation.176 In 195859, the Japanese economy showed an increase in
169 See also Johnson (1982), 264, for the causes.

170 They were established to prevent duplication and leverage each single
investment through integrative agreements among firms in one industry as to
who would invest how much in what type of product line. Schaede furthermore
evaluates its prospects as more positive since it did not interfere with the interests
of banks and large manufacturers: Schaede (2000), 96.
171 Johnson (1982), 267, states that two frameworks allowed for concerted
actions: the cooperative discussion groups and the industrial structure councils.
172 See Schaede (2000), 96.
173 See Ueno (1980), 427 ff.
174 See Headley (1970), 391, 4007: though industry was not always in favour
of MITIs policy, extensive loan and tax allowances provided important incentives
and constituted coercive tools if one considers their positional nature. See also
Johnson (1982), 268.
175 For a good account of the anticompetitive effect, the interested reader is
referred to Headley (1970), 348 ff.

176 See Headley (1970), Chapter 14, particularly Tables 14-7 and 14-8. While
most mergers in the 1950s were by small enterprises with little associated anticom-
petitive concern, the year 1961 marked a sharp upturn both of large mergers and
the total number of mergers. Waldenberger (1996), 202, notes that the (J)FTC
did take dynamic market conditions into account when assessing the competitive

Appendix 3 277
concentration ratios.177 To the extent that concentration ratios serve as

a good approximation of actual market concentration, it would suggest
that the costs of anticompetitive behaviour related to this aspect would
have risen.178 While Yamamura and Schaede view the prospects of effec-
tive AML enforcement with serious doubts,179 other authors180 consider
the broader picture and argue that, while the JFTC had to give ground
in some areas, it advanced in others. Reflecting the dual structure of
the economy that is, its division between large firms and SME181 the
Commission sought increased control of abusive behaviour.182 As well as
SME protection, the JFTC focused on consumer protection.
By the 1960s, Japanese society was proud of its economic achievements
and consumer concerns became more important. In 1962 a law against
false product advertising and labelling, and unjustified premiums and
prizes183 was enacted. Misonou is cited as criticizing this law as a reduction
of cut throat competition in the retail sector in the name of free trade.184
Irrespective of its original intent, however, it further empowered the JFTC
to protect consumers by outlawing excessive premium or price offerings,
deceptive labelling and misguiding consumers, and serves as a catch-all law
for cases not covered by the AML.185 Furthermore, in 1968 the Consumer
Protection Fundamental Act186 was enacted to enhance consumer inter-
ests by clarifying the responsibility of the state, local government and
effects of mergers, allowing for 19 mergers which had an accumulated market

share in excess of 30% during the years 196073.
177 See Yamamura (1966), 45760.
178 Bearing in mind the possible existence of cordial oligopolies (cordial
behaviour of firms competing with each other in several markets), social costs
could be even higher than mere concentration ratios would suggest.
179 Yamamura (1967), 84. Schaede (2000), 97, describes the JFTC as appearing
to have been sidelined for good.

180 Beeman (1997b), 48 ff; Mitsuo Matsushita (1993), 82; Iyori, Uesugi and
Heath (1994), 13 ff.

181 This point is particularly emphasized by Friedman (1988), who presents
a sound elaboration of this topic and its implications on the manufacturing

industry.
182 The Act against Delay in Payments of Subcontract Proceeds etc. to
Subcontractors of 1956, was amended in 1962, 1963, 1965 and, for the last time, in
1973, to prevent abuse by larger firms.
183 Law No. 154 of 15 May 1962.
184 Misonou, above note 58, 11518, in Beeman (1997b), 49. Beeman, ibid.,
questions the consistency of this law with the spirit of competition policy.
185 See Schaede (2000), 138. See also Iyori, Uesugi and Heath (1994), 6370,
for the most elaborate representation.

186 Law No. 78, enacted 30 May 1968.

businesses. In more general terms, a strong increase in the number of

formal price-fixing cases can be established for the 20-year period from
1957 to 1976.187 While bid rigging cases increased slightly over the same
period, retail price maintenance and unfair trade practices declined the
latter considerably stronger than the former, reflecting a dedicated JFTC
to apply Article 3 to establish a restraint of competition rather than a more
lenient unfair trade practice under Article 19 of the Act.188
Despite the JFTCs activism regarding restraints of competition and
price-fixing cases, the decade of the 1960s has to be viewed as one of rela-
tively weak antitrust enforcement. Though considerably stronger than it
was in the 1950s, pro-collusive forces were in effect shaping the regulatory
framework and contributed to a reduction in enforcement statistics, par-
ticularly after 1964.189 Increased recognition of consumer interests led to
more active enforcement at the end of the decade, before Nixon sent shock
waves across the Pacific.
5. ANTITRUST IN THE 1970s (197176)
Following the heavy military expenditure of the Vietnam War, the

American balance of payments soared. The Nixon administration sus-
pended the gold standard in August 1971 and introduced a 10 per cent
surcharge on imports. This was a shock for Japan, which depended heavily
on the US export market and had maintained a fixed exchange rate since
1949.190 This, paired with the reassessment of Sino-American relations
following a grim period of Cold War antagonism, provided the basis for
political shock waves. MITI president, Tanaka, capitalized on the difficult
situation by appeasing those forces on either side of the Pacific that saw
the dawning of a JapaneseAmerican economic war: he skilfully ended
the textile dispute by yielding to American demands, while providing an
extensive relief programme for the domestic industry.191 He initiated the
diplomatic revolution192 namely the normalization of Sino-Japanese
187 Schaede (2000), 161.

188 See Schaede (2000), 160 ff.
189 See Figure A3.1 at the end of this Appendix.
190 The currency peg with an exchange value of USD 1 5 360 Yen was estab-
lished by Dodge. See Gao (1997), 181; Yamamura (1967), 29 ff.

191 See Johnson (1982), 292 ff.
192 Buckley (1999), 120 ff. Despite the signing of the Sino-Japanese Peace and
Friendship Treaty of 1978, the relationship between the two nations is still far from
harmonious.

Appendix 3 279
relations and followed Prime Minister Sato into office. His industrial
relocation policy,193 involving several major infrastructure projects, added
to the rising inflation, which spurred from excess liquidity194 and left
the country ill-prepared for the oil shock of 1973. Heavily dependent on
oil imports, Japan experienced double-digit inflation.195 Actions taken
earlier196 were supplemented by the emergency petroleum countermeas-
ures policy,197 giving MITI extensive powers198 to reduce inflation.
It soon became evident that part of the rising prices was generated by
price-fixing agreements.199 The JFTC assumed a particularly active enforce-
ment policy. Formal cases investigated in 1973 rose sharply to 69, doubling
the number of the year before. Also comparatively high, the Commissions
activity level declined successively in the aftermath of the first oil shock.200
Taking advantage of the prevailing negative consumer sentiment, the JFTC
also started to successfully investigate larger companies, something it had
not dared to do because of the fierce opposition of MITI, politicians and
Zaikai.201 Particularly noteworthy is the filing of criminal charges against
the petroleum industry in 1974, which involved 12 firms in price fixing in
consultation with MITI; this was something the JFTC had not done since
the strong hand of SCAP disappeared.202 Though the defendants were
193 Tanaka published a book entitled A Plan to Remodel the Japanese

Archipelago, which envisaged infrastructure projects such as highways, railways,
social security and a pension system: Schaede (2000), 97.
194 Johnson (1982), 294.
195 Schaede (2000), 98, identifies five reasons for soaring inflation: (i) excess
liquidity was spurred by Tanakas investment plans and the inflation adjusted
wage negotiations of 1974; (ii) real estate speculation; (iii) consumer hoarding of
daily consumption goods (e.g. detergents and toilet paper) and speculative selling
restrictions of trading houses; (iv) cartels and self-regulation became ubiquitous,
limiting supply; and (v) the bankruptcy of SME reduced the competitive pressure
on larger enterprises.
196 The Temporary Emergency Law against the Cornering and Hoarding of
Daily Life and Other Products was passed in July 1973. Cf. Schaede (2000), 98.
197 Associated pieces of legislation embrace the Emergency Measures Law for
the Stabilization of the Peoples Livelihood of December 1973 and the Petroleum
Supply and Demand Mobilizations Law of December 1973.
198 Johnson (1982), 298, lists the following: to demand reports from wholesal-
ers and retailers on their supplies, to establish standard prices for special com-
modities, to produce plans for the supply of consumer goods and to fine violators,
essentially tipping the balance in Japan from self control back to state control.
199 For example, Johnson (1982), 298300.
200 The enforcement peak can be seen clearly in Figure A3.1 at the end of this
Appendix.
201 Schaede (2000), 99.
202 Cf. Schaede (2000), 99. Pape (1979), 476, notes, that the JFTC

acquitted with respect to the output restriction charge for lack of criminal
intent, they were found guilty of price fixing and, even more importantly,
the Tokyo High Court ruled that an administrative guidance cartel could
not allow an illegal cartel.203 This verdict not only juridically upheld anti-
trust policy before industrial policy but also served as a potentially deter-
ring precedent against other industries; indeed, these years can arguably be
called the most important years in antitrust policy history.204
Beginning in 1973, in the presence of high inflation and increased
market concentration, the JFTC chairman, Takahashi,205 pushed for
emancipating reforms of the AML. The proposed changes (as outlined in
Table A3.1, column (I)) would have tightened the AML with respect to
stockholding restrictions and financial institutions, re-established some of
the formerly (1953) enjoyed powers to contain oligopolies, and given the
JFTC new means to deal with Japanese business structure and practices,
more specifically aiming at trading companies and cost price disclosure.206
The right to issue orders to reduce cartel prices and cartel surcharges
would have helped to reduce some of the deficiencies of the AML regard-
ing restoring cartel prices to pre-cartel levels and raising criminal penalties
in order to reduce the expected benefits from collusion. Well aware of
its political weakness, the JFTC propagated a relaxed version of what it
would have longed for.207 In a favourable environment of public support
and high prices, and backed by the opposition parties,208 the ruling LDP
was coerced into considering a revision of the AML. Given the strong
opposition from large enterprises and MITI, Prime Minister Tanakas
encountered immense difficulties and obstacles in the criminal investigation of

this case.
203 For this case see Haley (1998), 899. The court decision was taken in 1980.
204 Misonou, above note 58, 226, in Schaede (2000), 99 ff.
205 Takahashi Toshihide was chief of the Ministry of Finances Banking
Bureau from April 1963 to June 1965 and believed that it was his job to defend the
AML. See Johnson (1982), 298.
206 Since Beeman (1997b) provides the only elaborate review of this period
known to the author, this passage will be based on his Chapter 5.

207 Examples cited by Beeman (1997b), 134, are: (i) excluding foreign stocks
in the restrictions on stockholdings by large companies, (ii) JFTCs consideration

of a companys international competitiveness before issuing an order to disinvest,
(iii) limiting surcharges to profits earned, and (iv) setting the maximum criminal
penalty at 5 million yen, instead of 10 million yen.
208 Beeman (1997b), 129 ff, states that the Clean Government Party and the
Japan Socialist Party submitted drafts to the Diet in 1974, covering most aspects
raised by the JFTC and in addition retail price maintenance (both parties), private
enforcement (both parties) and restrictive application of recession cartels (Clean
Government Party).

Table A3.1 Outline of different anti-monopoly law revision bills and proposals
(I) JFTC draft bill (II) First government (III) Five-party bill (IV) Second (V) Third government
(18 Sept 1974) bill (passed House of government bill (passed Diet 27
(25 April 1975) Representatives bill (21 May May 1977)
24 June 1975) 1976)
Measures Orders to divide a firm Order to divest a Same as column (II) (deleted) Same as five-party
against should it acquire a part of a firm or (but only one bill (column

monopolistic dominant position other means to consultation (III) (with some
conditions restore competition required) conditions added,
(two consultations including two
with related consultations
minister required) required)
Measures Order to disclose cost Requirement to (deleted) (deleted) Same as first
281
against prices in the event report to JFTC government bill
simultaneous of similar price reason for parallel (column (II)) (but
price increases price increases moved to new
increases by implemented in a chapter of AML to
oligopolisitic three-month period prevent weakening
firms JFTC powers)
Measures Order for firms Following JFTC JFTC may order (deleted) Same as first
against unfair engaged in an illegal finding against necessary measures government bill
restraints of cartel to reduce their a cartel, JFTC to eliminate the (column (II)) (but
trade (cartels) prices to pre-cartel may require the effects of illegal put under different
levels for a period of involved parties acts article)
up to six months to submit a report (Note: This language
on steps taken to was dropped in
eliminate the effects Diet deliberations
of the cartel, as following requests
28/03/2013 16:49
Table A3.1 (continued)
24 June 1975) 1976)
well as to report on by opposition parties)

the implementation
of these measures
Administrative Surcharge on price Surcharge on cartels Same as column (II), Same as Same as column (II)
surcharges for raising cartels limited affecting prices but added higher column (II)
illegal cartels to the excess profit to recover excess surcharge of 2% for
taken from cartel profit, including manufacturers
agreement (amount international
282
of price increase 3 cartels and
sales volume) agreements by
trade associations
(1.5% of gross
profit, except
1% for retailers
and 0.5% for
wholesalers)
Stockholding Prohibit large firms Prohibit large firms Same as column (II) Same as Same as column (II)
restrictions (exceeding (exceeding column (II) (minor changes in
on large 10 billion in 10 billion in conditions)
corporations capitalization or capitalization or
200 billion in total 30 billion in total
assets) from holding assets) from holding
stock in excess of stock in excess of
28/03/2013 16:49
their own capitalization their own
of half of net assets, capitalization of
whichever is greater half of net assets,
whichever is greater
Stockholding Decrease ceiling on Same as column (I) Same as column (I) Same as Same as column (I)
restrictions the holding of stock (insurance firms column (I)
on financial from 10% to 5% of excluded from the
institutions outstanding shares in change)

a given company
Criminal Increase maximum Same as column (I) Same as column (I) Same as Same as column (I)
penalties penalty from column (I)
500,000 to 5
million; make
corporate heads
283
responsible for cartel
acts
Measures Allow JFTC to take Same as column (I) Same as column (I) Same as Same as column (I)
against unfair any measures column (I)
trading deemed necessary
practices to end unfair trading
practices; make sure
such practices liable
to criminal penalties
Retroactive Allow JFTC to order Same as column (I) Same as column (I) Same as Same as column (I)
cease and necessary measures column (I)
desist orders to be taken despite
the cessation of
illegal activities
28/03/2013 16:49
Table A3.1 (continued)
24 June 1975) 1976)

Notification (not included) Require JFTC to Same as column (II) Same as Same as column (II)
requirements issue report column (II)
to reporters to those filing
of illegal acts complaints about
illegal acts which
outlines the
result of JFTC
284
investigation and
actions
Changes (not included) (not included) (not included) Several Same as column (IV)
in hearing provisions
and appeals to separate
procedures JFTC
hearing and
appeals
procedures,
etc.
Note: Major points and alterations are highlighted in bold lettering.
Source: Table adapted from Beeman (1997b), 3412.
28/03/2013 16:49
Appendix 3 285
enthusiasm was rather limited. Support rose when Miki succeeded the
Prime Minister, who had to resign as a result of a financial scandal of
moneypower politics (kinken seiji),209 bequeathing a weakened LDP to
his follower. The proactive Prime Ministers powers within the LDP were
too limited to push such a strict amendment through the Diet and his bill
(Table A3.1, column (II))210 was altered (Table A3.1, column (III)) and
transferred to the House of Councillors with the understanding that it
would be terminated there.211
While Miki and the opposition parties unsuccessfully defended the
unaltered introduction of the bill which was defeated the year before,
LDP fraction leaders, industrialists and MITI sought to water down the
bill and to weaken the JFTC either by separating its investigative and
quasi-juridical powers or by making the chairman of the JFTC a member
of the Cabinet.212 Criticism of the use of the JFTCs independent position
contributed to Takahashis abdication in February 1976, at the same
time as the Lockheed scandal occupied the members of parliament and
thus frustrated the prospects of a favourable revision of the AML. Prime
Minister Mikis conceding to the abolition of the divestiture clause and the
separation of the JFTCs investigation and quasi-juridical (hearing) func-
tions213 paved the way for the introduction of the bill in May 1976 (Table
A3.1, column (IV)). While the new JFTC chairman, Sawada Yasushi,
was more moderate than Takahashi and tried to avoid charges that his
Commission misused its discretionary power, opposition parties heavily
criticized the bill214 for it being watered down considerably. The bill was
introduced so late in the year that it had to be guillotined. The revision of
the AML dragged on for another year.
When the AML revision was finally enacted in 1977 it introduced
several changes to the law. As can be seen in Table A3.1, column (V), most
of these alterations were similar to those that had been proposed in the
revision bills of 1975 and 1976.
Of particularly note are the substantive215 provisions on monopoly
conditions, allowing the JFTC to order companies that have acquired
209 See Johnson (1982), 300 ff.

210 Initiated on 25 April 1975.
211 For a more elaborate discussion, the interested reader is referred to Beeman
(1997b), 153 ff.

212 Asahi Shimbun, 24 January, 9, and 12 February, 1 of 1976, in Beeman
(1997b), 156.
213 See Beeman (1997b), 158 ff.
214 Ibid., 158.
215 Haley (1998), 898, is quite enthusiastic about the inclusion of this provision.

a dominant position to disinvest. Although this was restricted by the

requirement that the Commission should consult216 the competent minis-
try, it reflected the reviving of the spirit of the original Article 8 (194753)
and the notion of structural control.217
While Haley218 positively evaluates the strengthened sanctions on
cartels and cartel proceeds, praising them in correcting the dif-
ficulty of penalizing cartels without resort to criminal sanctions,219
Schaede220 is more critical. She views the maximum fines221 for cartels
as being symbolic. Yet the deterrent effect of including a personal
liability clause,222 making corporate heads more responsible, supposedly
exceeds the effectiveness of pecuniary threats constituted by criminal
penalties.
The administrative fine223 system setting surcharges at 1.5 per cent of
cartelized sales, 2 per cent for manufacturing firms, 1 per cent for retail
firms, and 0.5 per cent for wholesale firms224 is to be evaluated critically
from an economic perspective since their deterrent effect appears to be
quite low by international standards. The system established certainly
falls short of the full internalization of all excess profits accrued by each
company over the full period of existence of a cartel, as was originally
proposed by the JFTC in 1974.225
The reporting system of parallel price increases in oligopolistic markets
within a period of three months was established in the course of the reform.
Though it fell short of the originally desired disclosure of pricing informa-
tion, it still amounted to a reporting duty which, nevertheless, helped to
circumvent the full burden of proof of communication of intentions to
216 In this context Schaede (2000), 103, speaks of notifying and cooperating
rather than consulting.

217 See Mitsuo Matsushita (1993), 83. Relevant concentration ratios were
CR1.5 50%, CR2.5 75% in order to take measures to restore competition.

218 Haley (1998), 898.
219 Haley (1998), 908, states that under the AML the primary penalties are
criminal (Arts 8995(2)) and that, until 1977, administrative fines could only be
levied in respect of violations of Commission decisions (Art. 97) and court injunc-
tions (Art. 98).
220 Schaede (2000), 103.
221 Increased from 500,000 yen to 5 million yen.
222 The incentives for management to collude will not be altered, if it can be
safely assumed that they will be compensated for any personal losses incurred for
the benefit of the company.
223 Allowing the JFTC to fine illegal cartels without a criminal trial: see
Schaede (2000), 103.

224 See Beeman (1997b), 162.
225 Ibid., 132.

Appendix 3 287
establish an unlawful concerted action.226 Matsushita227 argues that the

disinclination of entrepreneurs to reveal sensitive business data on produc-
tion and operation costs to the JFTC makes this reporting duty an effective
deterrent against parallel price hikes. By 1991 84 types of goods were listed
and the prices of those commodities rose less rapidly than the general price
level, but he also states that in general firms in oligopolistic industries do not
encounter great difficulties in raising prices.228 There are three factors that
potentially limit the systems applicability. The first is private enforcement.
It is not known to what extent the JFTC has received complaints from the
public.229 Active participation by consumers could render the system more
effective. The second factor is that the reporting system is, strictly speaking,
not a regulation as the provision requires only that the reports be filed.230
The third is that restrictions on establishing which markets are heavily con-
centrated significantly restrains the scope of applicability of this law.
The amended AML contained stricter stockholding limitations. Large
corporations231 were restricted from holding stock in excess of the capit-
alization of net assets, while the allowance for stockholdings for financial
institutions was reduced from 10 to 5 per cent. While this potentially
served to reduce the power of large enterprises, and of banks in particular,
the actual positive effects of these competition enhancing policies are
unknown and are thus subject to further research.
The inability to order firms participating in illegal cartels to reduce their
prices to pre-cartel levels implies that inadequate surcharges are the only
way to internalize unruly cartel proceeds and cement an economic system
with positive incentives to collude.
In the course of the revision, the Commission was empowered to order
measures despite the cessation of illegal activities, so that it was granted
the right to monitor whether its orders have been implemented.
226 See Mitsuo Matsushita (1993), 84. Furthermore, it should be noted that the
information cited by Beeman (1997b), 341, and Mitsuo Matsushita (1993), 84, and
(1990b), 45, differs in one important point: Matsushita states that the reporting
duty embraces cost data, while this element only referred to the original JFTC
draft but not to the further revision bills. The AML, however, reads that reasons
for parallel price increases must be delivered. No explicit reference to cost data is
given.
227 Mitsuo Matsushita (1993), 84, and (1990b), 45.
228 See Iyori, Uesugi and Heath (1994), 60 ff.
229 Investigations may be initiated by individuals under AML, Art. 45(1).
230 This point is raised by Mitsuo Matsushita (1990b), 45, although its direct
implications are unknown and subject to further research.

231 Defined as exceeding 10 billion yen in capitalization or 30 billion yen in net
assets.

Another important point of the 1977 reform was that the JFTC was
granted the right to take any measures to end unfair trading practices.
On this aspect, however, a caveat has to be voiced: Iyori, Uesugi and
Heath232 state that the desired amendment of Article 19 AML, con-
demning unreasonable restraint of trade, was not included in the 1977
revision.
The amendment of 1977 is to be regarded as a major breakthrough
for Japanese antitrust legislation. It was the first bill to unambiguously
strengthen the AML. Though the JFTCs powers still remained limited
and the AML was quite harmless for dominant firms and monopolists,233
it is noteworthy that the Commission gained ground in prosecuting
cartels and price cartels, in particular.234 Furthermore, a strong decline in
exempted cartels is attributable to the quick reduction in SME and export
association cartels.
6. THE STRUCTURAL DEPRESSION OF 1977 AND

ANTITRUST IN THE 1980s (197791)
6.1 The 1977 Depression and the Depressed Industries Law
Following the oil shocks with its rising energy prices, MITI started to
replace the energy intensive strategic industries with high-tech, high value-
added and capital intensive industries.235 The economy at large, and the
formerly supported and by now maturing industries such as textiles, paper
and aluminium, in particular, were suffering from high energy prices,
rising raw material prices and declining demand.236 The stronger import
competition and decreased export competitiveness237 was aggravated by
the gradual appreciation of the yen.238 It soon became apparent that the
suffering of the troubled industries was durative and that the only remedy
for continuous excess capacity was a structural reorganization of the
economy.
232 Iyori, Uesugi and Heath (1994), 101.

233 See Schaede (2000), 103.
234 See Schaede (2000), 161. During the period 196776, more than 70% of all
formal cases related to price fixing.

235 Schaede (2000), 103.
236 Young (1991), 137.
237 The newly industrialized countries penetrated Japans export markets: see
Tilton (1996), 39 ff.

238 Beeman (1997b), 170.

Appendix 3 289
While MITI aimed to reduce the production capacity in several indus-

tries in as early as 1976, the prospects of such attempts brightened only
when the governments policy focus turned away from inflation control
towards supporting the economy.239 The emerging jurisdictional dispute
over the future tenor of depressed industry policy circled around the
effectiveness and economic desirability of short-term recession cartels and
the likelihood of industries being able to form such cartels without gov-
ernment mediation, and their expected anticompetitive effect.240 Ongoing
trade liberalization and the oil cartel case241 had undermined MITIs
influence, which was to be even further reduced in 1980 when the Foreign
Trade and Foreign Exchange Control Laws were revised.242
The Ministry was too weak to defend its original proposal of the
Depressed Industries Law against consumers, scholars, the opposition
parties and the industry. The potential regulatory power that MITI would
obtain and the clause to restrict cartel outsiders from investing were
important points of critique.243 The JFTC opposed the bill on the basis
(i) that the necessary reduction in capacity could be achieved by using
recession cartels under its jurisdiction; (ii) of its flexible interpretation of
the AML in the presence of a structural depression announced by its chair-
man; (iii) of the generation of excessive government regulation, exemp-
tions of cartels, mergers and tie-ups leading to a self-defeating reduction in
competition; and (iv) of a perverse impact on downstream industries and
consumers.244 Fearing that the JFTCs criticism would raise further oppos-
ition, the government and MITI consented to most of the Commissions
demands by deleting outsider restrictions, setting a five-year time limit on
the designation of depressed industries, and removing the mergers and
business tie-up clause, while upholding the AML exemption of cartels as a
vital element to improve the industries.245
The Depressed Industries Law (Tokutei Fukyo Sangyo Antei Rinji Sochi
ho) eventually passed through the Diet in May 1978 and was designed to
reduce excess capacity in designated industries and make them competitive
by adjustment of the production process, diversification into more value-
added products, the development of new technology and the streamlining
239 Ibid., 171.

240 Ibid., 174.
241 Production Cutback case, filed 26 September 1980, Hanrei Jiho, 983, 22 et
seq.
242 Schaede (2000), 104.
243 Beeman (1997b), 175.
244 Ibid., 176.
245 Ibid., 177.

of distribution and marketing channels.246 The designation of an industry

was either established by MITI or, if two thirds of an industry wanted to
be designated, they could apply for such status. Rather than developing
and enforcing a series of guidelines, the government created a forum where
the most concerned parties could negotiate over the structure and imple-
mentation of the basic polices.247
Detailed stabilization plans were generally drawn up by the industries
and conceded by the ministries, which influenced the decision-making
process by selecting the stakeholders that were allowed to participate
and by using the depressed industries credit fund as an effective tool of
coercion.248 Neuschwander249 emphasizes that MITI acted as a normal
stakeholder on equal terms with the other participating forces, but at times
used passiveness to obstruct structural reorganization to effectively influ-
ence policy outcomes.
Industries falling within this law which were allowed to form a
cartel were corrugated paper, worsted yarn, discontinuous acrylic
fibre, continuous nylon fibre, continuous polyester fibre, discontinu-
ous polyester fibre, ammonia and urea. Industries that were designated
but not allowed to form recession cartels included hydrous phosphoric
acid, cotton spinning, ferro-silicon, shipbuilding, steel and aluminium
smelting.250
The JFTC served as an important check on cartel agreements and
ensured that competition was not severely restricted.251 Since much of
the envisaged disposal of excess production led only to their idling, the
Commission challenged the policy and its counter-productivity of delay-
ing the construction of state of the art facilities. Despite such differences
between MITI and the JFTC, the production plans drawn up under the
Depressed Industries Law were largely adhered to.252 Much of the success
246 Young (1991), 137. Tilton (1996), 45, emphasizes that the scope of cartels
established under this law by far exceeded the rights granted by the AML provi-
sions for depression cartels, which only foresaw production and sales agreements.
247 Young (1991), 140.
248 Schaede (2000), 105.
249 Neuschwander (1994), 125.
250 See Beeman (1997b), 343, Figure 13.
251 Ibid., 180. The anticompetitive effect was comparable with the Industry
Structure Law of 1983. See Beeman, ibid., 189.

252 See Beeman, ibid., 180, and Neuschwander (1994), 125 ff. Uekusa, Masu
(1988), 89117, especially 109, is critical of the industrial policy, stating that the
impressive 95% fulfilment rate of the production plans was attributable to a post-
ponement of investment and was largely achieved at the beginning of the enactment
of the plans, thus casting severe doubt on the effectiveness of industrial policy.

Appendix 3 291
in reducing production capacity and economic improvements made in

those industries coming within the legislation faded in the presence of
the second oil shock in 1979, and it became apparent that the designated
industries were in structural rather than temporal distress; thus MITI
concluded that cooperation and mergers were needed.
6.2 The Industry Structure Law of 1983 and Thereafter
Following the second oil shock in 197980, Japans economic reality

changed considerably.253 Heavy dependence on energy imports254 and
exchange rate appreciation255 further emphasized the hardships endured
by depressed industries. Both keidanren and the LDP,256 holding a major-
ity in parliament in the early 1980s, were pushing for a revision of the
AML. Since the labour unions were concerned about bankruptcies and
lay-offs, opposition parties were more inclined towards stronger support
for depressed industries.257
The Special Committee on Counter-policies for Basic Materials Industries
recommendation was much inspired by MITI Minister Yamanaka, who
generated respect for competition policy.258 Beeman259 states that the strong
antagonism between MITI and JFTC was more and more substituted by
cooperation. Reasons cited include the fostering of mutual trust and respect
under the period of collaboration260 over the 1978 law, the acceptance by
MITI officials of competition as the guiding economic principle, foreign
pressure261 and, last but not least, the personal beliefs of the MITI minister.
Hard points in the more amicable disputes over amending the 1978
Depressed Industries Law related to the exemption of mergers, joint
companies and tie-ups. The JFTC was not appeased by MITIs proposal
253 For an elaborate discussion of the Japanese economy, the interested reader
is referred to Komiya, Ryutaro, (1990) Chapter 8.
254 Neuschwander (1994), 126, cites the success story of energy savings in steal
production.
255 Implying that competition from the newly industrialized economies was
more strongly felt.

256 Politicians were quite displeased about JFTCs attacks on the construction
industry: see Beeman (1997b), Chapter 9.

257 Beeman (1997b), 182.
258 Ibid., 183.
259 This passage is based on Beeman, ibid., 183 ff.
260 Personnel relations were also intensified.
261 See Uriu (1996), 1334; Komiya, Ryutaro (1990), 327 and 344 ff, notes that
recessions were overcome by strong exports and that the resulting balance of pay-
ments surplus led to bilateral trade frictions.

to create groups among companies in depressed industries, spreading the

idea that intragroup mergers and cooperative ventures should be allowed,
while intergroup agreements would remain under the jurisdiction of the
JFTC. The Commission maintained that all mergers and tie-ups were to
fall under the AML. Further points which were included in the Special
Measures Law for the Structural Improvement of Designated Industries
of April 1983 were the establishment of general guidelines on which
arrangements and mergers were based,262 a JFTCs minister notification
and right of protest if tie-ups infringed the AML. Furthermore, MITI
agreed to inform the Commission of any agreements with the potential to
restrict competition that it wished to approve.
As with its predecessor, the law was temporarily confined to a five-
year period. Industries falling under this law at some point in time263
include steel, aluminium smelting, sugar refining, cement, electric wire
and cable, discontinuous viscous fibre, continuous nylon fibre, discon-
tinuous polyacrylnitrile fibre, continuous polyester fibre, discontinu-
ous polyester fibre, ammonia, urea, hydrous phosphoric acid, fused
magnesium phosphate fertilizer, compound fertilizer, ferro-silicon, high
carbon ferro-chromium, ferro-nickel, corrugated paper, ethylene, poly-
olefin, polyvinyl chloride, ethylene oxide styrene and polyvinyl chloride
pipes.264
The Structural Depressed Industry Law represented a compromise
between MITI and the JFTC. MITI was prevented from forcing resist-
ant firms to join cartels and was not permitted to grant AML cartel
exemptions, as the latter maintained control over licensing.265 The
anticompetitive effect of the broadening of the law has to be evaluated
on the basis of the Commissions effectiveness to check cartels, mergers
and tie-ups. Based on interviews with governmental officials, Beeman266
maintains that the anticompetitive effect was comparable with the
Depressed Industries Law of 1978 and that, despite issuing separate
guidelines for depressed industries, the JFTC did not significantly alter
its enforcement standards. With regard to groupings and cooperative
ventures, the Commission strived to maintain a 30 per cent market share
criterion, thus not substantially exceeding the generally applied 25 per
262 These included foreign competition, substitute goods, and difficulties faced
by the industries.
263 Several designations either started later or were revoked before the ending
of the law in 1988.

264 See Beeman (1997b), Figure at 344 ff.
265 Schaede (2000), 105.
266 Beeman (1997b), 189 ff.

Appendix 3 293
cent mark.267 The increased financial provisions268 accruing to firms and

R&D projects potentially generated a stronger leverage of industrial
policy on entrepreneurial decisions, which has to be questioned from a
positive perspective. The extensive scope of cooperation and bargaining
during the process of drawing up and fulfilling industry plans allowed
by the Structurally Depressed Industries Law could well have enhanced
industrys self-regulating abilities269 and fostered long-lasting mutual
understanding.
During the decade from 1977 to 1986, the decline in cartel exemptions
continued at a slower pace, although, as in earlier years, the main reduc-
tions are attributable to the decline in SME exemptions. With regard to
AML enforcement, formal actions remained low and below the trend
line,270 although the number of cases with trade association involvement
was somewhat lower than it had been in the preceding decade and rose
after 1987.271 In addition to these findings, a fundamental change in the
enforcement pattern is recognizable. While only slightly more than 30 per
cent of the formal actions (in comparison to over 70 per cent in 196776)
related to price fixing during the period 197786, unfair trade practices
and retail price maintenance cases more than doubled and bid rigging
more than quadrupled, reflecting favourably the newly gained confidence
of the JFTC.
The Structurally Depressed Industries Law expired in 1988 at the onset
of the bubble years (198791), when increasingly speculative investments
in the stock market led to an increase in the financial position of many
firms and thus to a reduction in lobbying efforts. Hence MITI was unable
to push for an extension of the Structurally Depressed Industry Law and
the country entered the following decade with no specific provisions for
troubled industries.
267 Though, occasionally, concentration ratios could be lower, as was the case
in the cement industry where a five-group five-firm configuration reached 21 per

cent for the largest group. See Tilton (1996), 99, and Young (1991), 140.
268 Tilton (1996), 45 ff, states that more than 75% of the 100 billion yen
provided under the Depressed Industries Law were not disbursed since falling
interest rates made fixed rates on government loans less attractive. In contrast to
this experience, the law of 1983 contained subsidies, Japan Development Bank
loans and tax incentives for investment in new equipment, capacity scrapping and
mergers.
269 This point is raised by Schaede (2000), 106.
270 See Figure A3.1 at the end of this Appendix.
271 This point is made by Schaede (2000), 168, Table 5.5.

7. CONCLUSION
The anti-monopoly law encountered much criticism and was generally
regarded as a means to destroy the war-riddled Japanese economy. By the
same token, the competition the JFTC was supposed to introduce in Japan
was also viewed as something alien to the Japanese. When the influence
of SCAP faded, dismantling reforms were initiated to weaken the JFTC.
Despite the JFTCs activism regarding restraints of competition and
price-fixing cases, the decade of the 1960s has to be viewed as one of
relatively weak antitrust enforcement. Though considerably stronger than
the 1950s, pro-collusive forces were in effect shaping the regulatory frame-
work and contributed to a reduction in enforcement statistics, particularly
after 1964 when Japan assumed more international obligations. Increased
recognition of consumer interests led to more active enforcement at the
end of the decade.
During the 1970s, the Commissions enforcement potential rose con-
siderably. This was in part attributable to the Nixon shocks, the oil
crisis and the general poor economic situation. The JFTC stepped up its
enforcement, also in respect of larger companies and, for the first time, the
Tokyo High Court ruled that the widely used administrative guidance
was insufficient to allow illegal cartels. The reform of 1977 was the first to
unambiguously strengthen the AML.
The financial hardship of those industries that depended heavily on
energy imports and on the exchange rate was supported by the Depressed
Industries Law (197883) and its successor, the Industry Structure Law
(198388). MITI assisted industries to scrap excess capacities. The rela-
tionship between MITI and the JFTC moved from being rather antago-
nistic to one characterized by cooperation. The specific provisions for
depressed industries were phased out at the onset of the bubble economy
(198791).
Despite a comparatively low enforcement record during the 1980s, a
fundamental change in the enforcement pattern towards bid rigging is
recognizable. This, in turn, underlines the newly gained confidence of the
JFTC.

Appendix 3 295
80
Number of formal actions
70
60
50
40
30
20
10
0
47
51
55
59
63
67
71
75
79
83
87
91
95
99
03
07
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Year
Number of formal actions of the JFTC
Linear (number of formal actions of the JFTC)
Sources: Data until 1995 taken from Beeman (1997b); thereafter data from JFTC Annual
Reports.
Figure A3.1 Enforcement peak with trend line

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Index
abusive conduct 2667 enforcement see private enforcement;
accelerated procedure 989, 2335 public enforcement
acceptable allocation 489 legislation see anti-monopoly law
active enforcement 139, 255, 278, 294 appraisal, law and economics 56, 102,
administrative enforcement 11 115, 125, 150, 157, 170
administrative fines 4, 65, 114, 118, appreciable effect 701
286 Arai, K. 183
administrative law 91, 93, 105, 1346, ascending price auctions 389, 446,
174 489, 512, 556
administrative monopolies 115, 121 asymmetry, information 2, 28, 36, 41,
advertising 14, 16, 18, 23, 139, 220, 166
228 attestation documents 131, 252
agreements 267, 2931, 434, 6773, auctioneers 4, 3841, 44, 48, 513, 58
11617, 1212, 1446 responses 43, 51, 89, 103, 128
collusive 29, 42, 117, 208 and Chinese law 1303
framework 90, 98, 104, 107, 2267, and EU law 96102
2323, 235 auctions 3, 3648, 507, 60, 102, 128
market-sharing 745 ascending price 389, 446, 489,
technology transfer 72 512, 556
vertical 71, 73 closed 38, 467, 56
allocation 3, 367, 47, 58, 61, 91 descending price (Dutch) 38, 512,
acceptable 489 56
customers 147 designs 37, 414, 52, 55, 578, 96,
market 70, 139, 146, 259 102
allocative efficiency 1516, 36, 39 distribution of proceeds 8994, 102,
AML see anti-monopoly law 128, 132
analysis, economics 56, 125 English 38
anti-corruption focus 134, 136 entry deterrence 50, 95, 130
anti-monopoly law 3, 5, 15, 19 first-price sealed-bid 38, 512, 55,
China 11112, 11523, 127, 244 57
enforcement 139, 157, 167, 277, 293 formats 3741, 469, 51, 57
Japan 13852, 154, 15660, 164, closed 47, 56
16974, 176, 183 models 37, 39, 41, 46
history 25495 multiple unit 39, 45, 479, 51, 56
Anti-Unfair Competition Law 11215, open 38, 47
127 pay-as-you-bid 467
anticompetitive conduct 121, 154, 156 rules 3, 367, 43
anticompetitive effect 6970, 145, 166, secondary 445
256, 276, 290, 292 sequential 39, 52
anticompetitive object 689, 73 simultaneous 48, 52, 56
antitrust standard 378, 215
315

theory 35, 65, 212, 215 low-value 45, 56

China 11011, 113, 12836 lowest 1, 37
and collusion participation 53, 133
empirical findings 5860 potential 46, 51, 534, 100, 1301,
lessons 4158 1334, 179
EU 89107 preferences 3, 37, 41
uniform-price 468, 56 small 47, 71
Ausubel auction 459 successful 35, 57, 90, 96, 129, 235
average cartel overcharge 76, 87 valuations 3940
award criteria 934, 135, 219, 240 winning 389, 59, 104, 134
design 93, 219 bidding 1, 3, 534, 179, 183, 21011,
objective 106, 239 246
award procedures 945, 99, 229, 231, behaviour 967, 130
236, 240 cartels 97, 179, 184
awarding public procurement winners competitive 42, 57
58, 60 costs 51, 131
awarding public works contracts 106, procedures 110, 128, 132, 246, 252
239 process 44, 89, 128, 180, 247
strategies 40, 47, 53, 1301
backlogs 825, 87 Bidding Law (BL) 110, 1256, 12932,
Bain, J. 1517 134, 136, 244, 24653
Bajari, P. 59 bids 1, 3840, 468, 523, 557, 901,
balance of payments 269, 278 2478
Baldwin, L. 589 identical 49, 54, 578, 128
bankruptcies 99, 150, 2057, 236, 279, sealed 42, 133
291 winning 57, 113, 179, 2523
banks 2056, 276, 287 Bisson, T.A. 1389, 256, 25861, 266
bargaining power 25960, 265 Block, M. 60
barriers to entry 1416, 18, 312, 214 block exemptions 71, 81
Becker, G.S. 910, 113, 11516, 147, broadcasting 226, 228
150 Brozen, Y. 17
Beeman, M 13840, 155, 1647, Brusco, S. 49
2589, 2669, 2712, 28492 bubble economy 140, 164, 189, 193,
Belgium 923, 101, 1056, 21819, 201, 203, 255
223, 228, 2389 Buckley, R. 140, 157, 255, 260, 278
bid documents 134, 252 budgets 1578, 162
bid rigging 15 Bulow, J. 54
Chinese regime 11227, 243, 255 business evaluation systems 179, 183,
EU regime 6688 21011
industrial economic insights 2835
Japanese regime 14277, 278, 2934 candidates 94, 96, 99, 220, 229, 2356,
bid submissions 2, 60, 90, 102, 130 240
bidders 3654, 5660, 8991, 967, eligibility 228, 236, 247, 250
1024, 12931, 1336 minimum number 22930
behaviour 3, 40, 213 capital 23, 76, 78, 201, 274, 288
credible 54, 131 capitalization 2823, 287
eligible 123, 247 cartelization 2, 14, 51, 146, 176, 1789,
identity 48, 534, 57, 60, 91, 96, 21214
1034 cartels
less informed 467 bid rigging see bid rigging

Index 317
bidding 97, 179, 184 auction theory 11011, 113, 12836

cheating 34, 52, 567, 135 bid rigging regime 11227, 243, 255
creation of 212, 216 Bidding Law (BL) 110, 1256,
destabilize 4, 51 12932, 134, 136, 244, 24653
distribute 91, 93, 103, 129, 208, 214 Civil Code 144
division of proceeds 43, 129 Competition Law 115, 11718, 120,
enforcement 43, 58, 91, 128, 183, 122
207, 210 Government Procurement Law
exemptions 263, 276, 289, 293 (GPL) 50, 110, 120, 1256,
existing 42, 21516 12834, 24353
export 270 Interim Provisions on Prohibiting
formation 28, 423, 501, 545, Bid-Rigging 11314, 124
1289, 1334, 21516 Ministry of Commerce (MOFCOM)
and Chinese law 12833 121
and EU law 89104 National Development and Reform
industrial economics insights Commission (NDRC) 121
2932 Penal Code 11113, 1245, 127
government-authorized 138, 256 private enforcement 120, 1223, 127
and industrial economics 247 public enforcement 1203, 127
leaders 75, 173, 176 public procurement laws 1256,
members 30, 335, 558, 601, 24353
834, 1045, 12930 advertising and transparency rules
bids 5960 24950
membership 301, 51, 97 applicable law 2446
per se illegality of 144, 262, 265 and auctioneer responses 1303
price 167, 288 award of contract 2523
rationalization 2635, 268 bidder eligibility 2502
recession 265, 26870, 280 and cartel formation 12833
renegades 35, 1045, 107, 1345, and cartel stability 1335
201, 207, 209 general issues 253
detection 105, 135 and new entries 12930
ringleaders 153, 156, 170 procurement procedures and
stability 9, 43, 50, 52, 548, 1289, purchasing formats 2479
184 substantive rules 24653
and Chinese law 1335 winner determination and
and EU law 1047 distribution of auction
and industrial economics 21, proceeds 1289
278, 335 State Authority for Industry and
stabilization 107, 215 Commerce (SAIC) 114, 116,
successful 94, 96, 129 121, 124
cease and desist orders 148, 1534, State Council 116, 121, 126, 128,
169, 264, 283 247
ceiling prices 97, 179, 181, 1834 civil liability 834, 11820, 123, 126,
Chicago School 14, 19 251
China 12, 46, 63, 74, 10936, civil servants 12, 40, 1578, 1735,
21516, 2434 1801, 183, 21011
Anti-Monopoly Law 11112, involvement 1745, 21011
11523, 127, 244 class actions 11920, 123, 172
Anti-Unfair Competition Law classical industrial economics
11215, 127 framework 28, 33

clearing prices 467, 56 competitors 25, 27, 304, 119, 1314,

closed auctions 38, 467, 56 17983, 20910
closure rules 55, 58, 104, 1323 potential 50, 97, 1302, 180
codes of conduct 183, 210 complex contracts 220, 229
coercion 264, 290 concentrated industries 17, 27, 34
Collins, N.R. 18 concentration 2, 1518, 20, 256, 29,
collusion 256, 289, 1235, 184, 201, 121, 273
2089, 21314 ratios 258, 277, 286, 293
and auction theory 3661 concerted actions 146, 2756
empirical findings 5860 concerted practices 678, 71, 73
lessons 4158 concerted refusals to trade 1534
costs 26, 31, 74 confidence 140, 209, 2934
detection 43, 51 confiscation 114, 11819, 123, 1256
in-auction 4, 42 conglomerates 16, 2578
overt 26, 31 Connor, J. 767, 87, 151
scope of 1256 consolidation 2078
tacit 478, 53, 213 consortia 97, 100, 1024, 107, 1313,
collusive agreements 29, 42, 117, 208 215, 237
collusive behaviour 42, 58 members 102, 132
collusive mechanisms 423 conspiracies 12, 29, 60, 10910, 117,
collusive practices 52, 125, 146, 191 122
collusive tendering 73, 124 construction companies 179, 186,
Comanor, W.S. 18, 54 199200, 203
Common Procurement Vocabulary licensed 187, 189
(CPV) 978, 2201, 232 construction industry 2, 45, 63, 110,
common value models 40, 41, 55 125, 130, 147
authorities 2, 70, 813, 117, 120, demand side 192205
123, 1601 Japan 5, 35, 109, 141, 178211, 214
national 81, 867 prices 184, 18990
enforcement agencies see public demand 195, 197, 199, 2078
enforcement agencies construction work price deflator
excess 2745 18990
fair 110, 130, 145, 250, 258, 264 consultations 79, 116, 270, 279, 281
law, EU 2, 667, 69, 714, 82, 858, consumer interests 139, 145, 258,
95 2778, 294
policy 21, 28, 145, 157, 1624, 277, consumer price index 164, 190
291 consumers 17, 22, 30, 72, 117, 277,
competitive behaviour 42, 56, 261 289
competitive bidding 42, 57 contract documentation 105, 234,
competitive dialogues 90, 94, 98, 229, 238
233 contract values 1, 97, 1256, 1823
competitive disadvantage 18 contracting authorities/entities 93, 95,
competitive negotiations 130, 2478, 98100, 106, 217, 219, 22141
252 contractors 97, 100, 192, 2312, 237
competitive outcomes 15, 256, 29 groups of 251
competitive pressures 23, 213, 279 composition 100, 237
competitive prices 66, 73, 11213, 142 suggested 249
competitive relationships 144 suitability 99, 236
competitiveness, international 2723, contracts 8991, 935, 97100,
280 22530, 23540, 2438, 2513

Index 319
award of 23841, 2523 treble/triple 114, 11920, 123, 138,

complex 220, 229 172, 258
construction 98, 192, 203, 233 dead weight losses (DWL) 1, 224,
employment 226, 228 145, 150
framework see framework debt burden 187, 2057
agreements/contracts demand reduction 459, 53
prime 191 demand schedules 467, 49
public 91, 98, 101, 103, 2267, democracy 138, 145, 256, 258
2323, 2412 Demsetz, H. 17, 19
service 93, 219, 221 Denmark 923, 101, 21819, 234
supply 93, 219, 221 Depressed Industries Law 140, 255,
works 93, 184, 219, 221, 226 28894
secret 228 derogations 71, 11718, 131, 2301,
service see service contracts 246
control agencies 138, 254, 2567 descending price auctions 38, 512,
cooperation 27, 31, 33, 81, 13940, 56
291, 2934 design 4, 39, 42, 61, 215, 229
cooperative behaviour 32, 44, 270 choices 21, 52
corruption 1, 35, 79, 111, 1256, contests 2289
1335, 248 designated bidders 43, 56, 183, 186
cost reduction 17, 270 designated industries 289, 2912
cost structures 16, 26, 301, 33, 59, destabilize cartels 4, 51
119 detection 911, 27, 34, 545, 1335,
costs 12, 911, 20, 223, 256, 147, 1502, 1767
1735 of cartel renegades 105, 135
bidding 51, 131 of cartels 4, 65, 170
of cartelization 170, 176 of collusion 43, 51
of collusion 26, 31, 74 EU 815
construction 192, 210 ex post 53, 60, 178
expected 910, 12, 32, 55 likelihood of 334, 88, 113, 115,
information 99, 103, 107, 131, 181 125, 154
of infringement 173 rates 878, 11819, 126, 151, 156,
marginal 202, 24, 26, 33 170
production 27, 32, 34, 213, 274 risk of 127, 147
social 10, 14, 23, 110, 150, 277 deterrence 10, 76, 78, 87, 123, 126, 152
transaction 3, 15, 46, 220, 252 effective 125, 148, 151, 156, 169,
true 27, 34 1723, 264
CPV see Common Procurement entry 945, 103, 129
Vocabulary optimal 111, 142
Cramton, P. 457, 49, 524 deterrent effect 34, 756, 81, 118, 148,
credible bidders 54, 131 151, 286
criminal penalties/sanctions 878, Dick, A.R. 29, 270
1235, 148, 154, 156, 16870, 176 diligent tenderers 105, 238
EU 7881 disclosure 35, 51, 55, 58, 69, 86, 1301
customer allocation 147 discount rates 267, 31, 33
cut-throat competition 139, 179, 209 discretion 106, 129, 181, 183, 2389,
245, 259
damages 12, 80, 856, 11920, 1423, discriminatory pricing 1534
1712, 1745 dismantling reforms 254, 294
claims 856, 171, 173, 175 dissolution 254, 2568, 266

distribution 41, 46, 51, 589, 72, 129, eligibility 97, 99, 103, 132, 232, 236,
132 251
distributive symmetry 3941 candidates 228, 236, 247, 250
domestic products 1312, 251 eligible suppliers 12930, 2489
dominance 95, 103 empirical evidence 42, 45, 110, 112,
dominant bargaining positions 142, 151, 270
1534 employees 160, 187, 189, 257
dual step procedures 104 employment 16, 52, 58, 137, 183,
duration of violations 745, 87, 1502, 1878, 207
156, 225, 2312 contracts 226, 228
Dutch auctions see descending price enforcement 913, 57, 878, 1201,
auctions 1401, 1478, 1668
DWL see dead weight losses active 139, 255, 278, 294
dynamic efficiency 16, 19 administrative 11
dynamic purchasing systems 90, 98, agencies 28, 32, 812, 114, 11617,
227, 229, 2323, 235 121, 123
anti-monopoly law (AML) 139, 157,
economic analysis 15, 109, 145, 178, 167, 277, 293
184 cartels 43, 58, 91, 128, 183, 207, 210
industrial 21214 Commission 139, 167, 255, 294
economic distress 21011, 262 competition law 88, 121, 123, 154
economic models 217 criminal 11, 160, 168
economic operators 99, 102, 22930, dedication 166, 176
232, 2356, 238, 250 effective 11, 123, 157
foreign 98, 233 errors 82
preferential treatment 93, 219 patterns 140, 2934
professional ability 100, 237 private see private enforcement
economic perspective 30, 66, 1034, public see public enforcement
114, 116, 130, 156 record 140, 167, 170, 259, 294
economic profit 17, 23, 150, 264 statistics 139, 157, 164, 167, 210,
economic standing 99100, 102, 272, 278
2367, 251 surcharge 148, 150
economic theory 2, 47, 15, 19, English auctions see ascending price
11516, 1301, 135 auctions
limits 21216 entry 1418, 312, 79, 209, 214, 255,
on optimal deterrence and 275
enforcement 913 barriers to 1416, 18, 312, 214
effective competition 85, 97, 132, 232, deterrence 945, 103, 129
2356, 250 new 43, 50, 129
effective deterrence 125, 148, 151, 156, and Chinese law 12930
169, 1723, 264 and EU law 946
effectiveness 45, 27, 41, 54, 11112, equal treatment, principles 923,
1412, 28990 21819
efficiency 17, 36, 434, 46, 226, 245, error costs 11, 82
273 EU (European Union) 12, 46, 656,
dynamic 16, 19 713, 878, 103, 21922
productive 15, 19 auction theory 89107
elasticity, price 23 bid rigging regime 6688
electronic auctions 91, 1025, 107, agreements 689
215, 229, 232 criminal sanctions 7881

Index 321
detection and enforcement 815 European Chamber of Commerce

effect on trade between Member 251
States 712 European Competition Network 81,
exemptions 723 84
fines 748 evidence 16, 29, 69, 21315, 231,
law and economics assessment 2378, 2612
7386 of collusion 54, 59
legal framework 6673 empirical 42, 45, 110, 112, 142, 151,
object or effect 6971 270
private enforcement 856, 88 ex post detection 53, 60, 178
public enforcement 7485 excess competition 2745
undertakings 67 excess liquidity 279
Commission 12, 812, 85, 155, exchange of information 45, 54,
1623, 21920, 241 8991, 128, 180, 183, 210
Common Procurement Vocabulary exemptions 67, 72, 139, 264, 267,
(CPV) 978, 2201, 232 2913
law 65, 69, 869, 91, 1016, 217, block 71, 81
23940 expected costs 910, 12, 32, 55
and auctioneers, responses experts 159, 231, 2489, 252
96102 export cartels 270
and cartel formation 89104 exports 267, 269, 271, 2734
and cartel stability 1047 externalities 49
competition 2, 667, 69, 714,
7982, 858, 11516 fair bets 41
and new entries 946 fair competition 110, 130, 145, 250,
procurement 65, 89, 94, 104, 258, 264
21742 Fair Trade Commission 146, 259
advertising and transparency rules Feinstein, J. 60
2325 financial crisis 1, 201, 2089
applicability 2228 financial institutions 263, 280, 287
award of contract 23841 financial interests 79, 236
conduct of procedure/elgibility for fines 4, 1012, 804, 87, 11819,
tender 2368 1257, 152
general rules 241 administrative 4, 65, 114, 118, 286
material scope 2278 EU 748
personal scope 2226 levels 878, 149, 151, 177
public procurement procedures low 123, 125, 173, 176
and purchasing formats maximum 124, 286
22832 reduction 834
reform 2412 first-price sealed-bid auctions 38,
substantive rules 22841 512, 55, 57
thresholds 2267 Fisher, F.M. 17
winner determination and fisheries 1978, 269
distribution of auction Five- party bill 2812, 284
proceeds 8994 foreign capital 2601, 267, 275
national competition authorities foreign companies 132, 192, 251
(NCAs) 812, 84, 867 foreign competition 100, 292
Treaty on the Functioning of the foreign firms 181, 274
European Union (TFEU) foreign pressure 137, 273, 291
6673, 79, 85, 117, 227 forestry 1978

formal actions/cases 140, 1648, 268, Headley, E. 1389, 2568, 2601,

279, 288, 293, 295 2634, 266, 2734, 276
formation, cartels/collusions 289, Heath, C. 139, 1456, 152, 169, 2634,
423, 501, 545, 89, 1024, 277, 2878
1289 Hendricks, K 43, 45, 502, 578,
four freedoms 65, 91, 101 128
framework agreements/contracts 90, heterogeneous goods 39
96, 98, 1035, 107, 2323, 235 homogeneous goods 49, 56
France 913, 978, 1001, 21719,
2223, 225, 233 identity of bidders 48, 534, 57, 60,
franchising 3, 15 91, 96, 1034
fraud 66, 7980, 86, 99, 236 illegal activities 910, 147, 1501
free competition 106, 139, 239, 259 illegal cartels 123, 140, 280, 287, 294
Funahashi, K. 1601 imperfect knowledge 3, 15
Important Industries Control Law
game theory 18, 201 138, 258, 271
Gao, B. 13940, 25960, 266, 2689, imprisonment 1011, 80, 124, 146,
2735, 278 156, 159, 169
GDP (gross domestic product) 109, in-auction collusion 4, 42
137, 1623, 185, 1934, 208 in-auction sanctioning 104, 135
general interest 2234 in-auction signalling 48, 8991, 102,
Germany 801, 92, 101, 124, 218, 226, 107, 215
2301 incentive structures 9, 434, 115, 147
government-authorized cartels 138, incentives 9, 12, 257, 30, 334, 4951,
256 558
government procurement see public independence 3940, 141, 1589, 166,
procurement 254, 267, 26970
Government Procurement Law (GPL) independent-value models 41, 44, 51
50, 110, 120, 1256, 12834, industrial economics 35, 1427, 63,
24353 111, 134, 141, 178
GPL see Government Procurement analysis 21214
Law 50, 110, 120, 1256, 12834, bid rigging insights 2835
24353 and cartels 247
Graham, D. 434, 53 formation 2932
Greece 2301 stability 21, 278, 335
Grimm, V. 48 economic models 217
gross domestic product see GDP historical overview 1421
groups of contractors 251 insights 14, 178, 212
growth new 20, 289
economic 258, 266, 268 static monopoly model 14, 214
public sector 193 theory 29, 33, 63
guidelines 712, 747, 121, 153, 164, industrial markets 33, 35, 50, 55, 57,
290, 292 130
industrial policy 141, 254, 271, 275,
Haley, J.O. 140, 2589, 264, 266, 280, 290, 293
2701, 280, 2856 industry data 1617, 213
Harberger, A.C. 223 Industry Structure Law 140, 255,
hard core restrictions 712 2901, 294
Harrington, J.E. 21, 246, 2930, 213 inefficiency 478, 145
Hay, D. 22, 246, 29 see also efficiency

Index 323
inflation 1646, 18990, 209, 214, 255, 19541958 26773

279 1960s 2738
information 12, 27, 3941, 5760, 1970s 27888
814, 1801, 213 1977 depression and Depressed
asymmetry 2, 28, 36, 41, 166 Industries Law 28891
background 217, 254 history 25495
costs 99, 103, 107, 131, 181 Industry Structure Law of 1983
exchange of 45, 54, 8991, 128, 180, and thereafter 2913
183, 210 occupation era 25467
private 40, 44 bid rigging regime 14277, 278,
relevant 967, 104, 182, 210, 235, 2934
250 alternative legal measures 1736
sensitive 27, 57, 177 legal framework 14276
information disclosure see disclosure public enforcement 14870
infringement 4, 66, 69, 735, 778, tort law 1434
826, 150 Civil Code 143, 1702
costs of 173 competition policies 140
inhibition strategies 50, 95, 130 construction industry 5, 35, 109,
injunctive relief 172 141, 178211, 214
Inoue, A. 143, 148, 1501, 1712, debt burden 2057
174 demand side 192205
interdependence 24, 26, 29, 47, 179, labour, industry structure and
183 prices 18791
Interim Provisions on Prohibiting Bid- subcontracting 1912
Rigging 11314, 124 Depressed Industries Law 140, 255,
internal market 4, 65, 91, 1001 28894
international competitiveness 2723, developmentalism 269
280 economy 25960, 262, 2678, 2724,
interpersonal contacts 1801, 183 276, 291
investigations 11, 845, 878, 1212, Five-party bill 2812, 284
1601, 166, 16871 Important Industries Control Law
criminal 160, 169, 280 138, 258, 271
investigative powers 81, 84, 87, 1223, Industry Structure Law 140, 255,
160, 164, 1767 290, 2914
Ireland 222, 2256, 234 Japanese Fair Trade Commission
Ishibashi, I. 183 (JFTC) 14853, 15664,
Ishii, R. 59, 17980, 183 16673, 1758, 2618, 27981,
Ishii-Ishibashi, R. 183 28395
Italy 67, 92, 101, 218, 224, 2301 draft bill 2812, 284
Iwamizawa 175 Liberal Democrat Party (LDP) 158,
Iyori, H. 139, 1456, 152, 2634, 182, 268, 275, 285, 291
2734, 277, 2878 Local Autonomy Act 142, 172,
1745
Japan 2, 45, 137212, 2545, 25862, Ministry of Commerce (MOFCOM)
2789, 294 121
Act concerning Elimination and Ministry of Economics Trade
Prevention of Involvement in andIndustry (METI) 138, 140,
Bid Rigging, etc. 1756 199
anti-monopoly law 13852, 154, Ministry of Finance (MOF) 1578,
15660, 164, 16974, 176, 183 275

Ministry of International Trade and legal systems 45, 11, 87, 124
Industry (MITI) 138, 140, 158, leniency policies 834, 1223, 148,
2623, 26676, 27980, 28894 157, 1601, 170, 176
Ministry of Public Management, less informed bidders 467
Home Affairs, Post and Levin, D. 489
Telecommunications (MPHPT) liability 10, 78, 84, 102, 104, 120, 205
1589 civil 834, 11820, 123, 126, 251
nuclear disaster 201, 2089 liberalization 2735, 289
occupation era 25467 licensed construction companies 187,
Oil Cartel Price-Fixing case 1446 189
opposition parties 280, 282, 285, likelihood of detection 334, 88, 113,
289, 291 115, 125, 154
private enforcement 1478, 1703, limited resources 84, 185, 212
1767, 280, 287 limits of economic theories 21216
public enforcement 14870 liquidity, excess 279
Research Institute of Construction Lisbon Treaty 66, 79
and Economy (RICE) 185, lobbying 181, 183, 210
1879, 195, 2089 local authorities 91, 100, 174, 217, 225
Supreme Commander of Allied local content requirements 234, 251
Powers (SCAP) 1389, 169, local government 1735, 277
255, 25863, 269, 279, 294 local public enterprises 1957
Tokyo High Court 140, 144, 146, Lopomo, G. 49
171, 264, 280, 294 losses 23, 33, 86, 150, 212, 224, 275
Japanese Fair Trade Commission dead weight 1, 224, 145, 150
(JFTC) 14853, 15664, 16673, lottery schemes 4950, 578, 91, 128
1758, 2618, 27981, 28395
japanification 254, 266 Mailath, G. 42, 45
JFTC see Japanese Fair Trade managed economy 269, 273
Commission Manelli, A.M. 49
Johnson, C. 13840, 1578, 256, 258, manufacturing 14950, 156, 2034,
2623, 2736, 27880 209
joint profit maximization 26, 301 marginal revenue 212
margins 76, 87, 150, 152, 156, 185, 192
Kagel, J.H. 489 market demand 20, 33, 48
kankoku stan 2623, 268, 276 market entry see entry
Klemperer, P. 40, 434, 50, 534, 567 market participants 24, 29, 54
knockouts 435 market performance 1819, 25
knowledge market power 17, 1921, 25, 478,
imperfect 3, 15 115, 1456, 270
technical 99100, 2367, 251 market share 18, 267, 314, 56, 71,
73, 149
Lande, R.H. 87, 151 market-sharing agreements 745
law and economics assessment 56, market structures 3, 1416, 18, 37, 213
936, 102, 105, 1345, 152, 16970 markets 35, 259, 335, 46, 70, 756,
LDP see Liberal Democrat Party 2089
legal entities 77, 147, 156, 170, 176 allocation 70, 139, 146, 259
special 138, 256 competitive 1920
legal framework 5, 19, 66, 113, 142, concentrated 17, 256, 29
147, 257 concentration see concentration
legal personality 67, 2234 industrial 33, 35, 50, 55, 57, 130

Index 325
regional 186, 209 private 138, 142, 149, 1534, 173,

relevant 32, 74, 95, 103, 118, 1223, 254, 258
178 monopoly agreements 11516, 121
Marshall, R. 41, 435, 53, 589, 174 Motta, M. 778, 80, 83
Martin, S. 1, 1623, 257, 301, 34, MPHPT see Ministry of Public
1467, 259 Management, Home Affairs, Post
material scope 113, 220, 222, 2278, and Telecommunications
243, 2456 multi-unit auctions 39, 42, 44, 47, 52,
Matsushita, M. 139, 1446, 1823, 556, 133
261, 2637, 2734, 2867 multi-unit Vickrey auctions 467
McGowan, J.J. 17 mutual recognition 93, 179, 183,
mergers 207, 260, 263, 2757, 289, 21819
2913 Myerson, R. 402
METI see Ministry of Economics
Trade and Industry national bias 65, 97, 1003, 107, 131,
Milgrom, P. 36, 39, 412, 567 133
mining 2034, 209 national competition authorities
Ministry of Commerce (MOFCOM) (NCAs) 812, 84, 867
121 national courts 72, 81, 86
Ministry of Economics Trade and National Development and Reform
Industry (METI) 138, 140, 199 Commission (NDRC) 121
Ministry of Finance (MOF) 1578, national law 656, 72, 7980, 856,
275 104, 229
Ministry of Internal Affairs and national tenderers 91, 100, 217
Communications 188, 190 NCAs see national competition
Ministry of International Trade and authorities
Industry (MITI) 138, 140, 158, NDRC see National Development and
2623, 26676, 27980, 28894 Reform Commission
Ministry of Public Management, Negishi, A. 1445, 264
Home Affairs, Post and Tele- negligence 143, 171
communications (MPHPT) 1589 negotiations, competitive 130, 2478,
Misonou, H. 2623, 2678, 2713, 252
277, 280 net assets 283, 287
MITI see Ministry of International Netherlands 38, 98, 145, 234
Trade and Industry Neuschwander, T. 2901
models 1822, 245, 39, 41, 46, 59 new empirical industrial organization
auction 37, 39, 41, 46 20
common value 40, 41, 55 new industrial economics 20, 289
economic 217 Nold, F. 60
game theoretic 201 non-cartel members 55, 59
independent-value 41, 44, 51 non-discretionary procedures 93, 108,
private-value 401, 45 216
static monopoly 14, 214 non-discrimination 923, 97, 99, 106,
MOF see Ministry of Finance 21819, 233, 236
MOFCOM see Ministry of Commerce non-manufacturing 2034
monopolies 1415, 214 non-profit 67, 229
administrative 115, 121 notification 989, 159, 2334, 250
monopolistic output 212 prior 98, 233, 235
monopolists 212, 245, 288 requirements 2345, 284
monopolization 139, 164, 2656, 273 nuclear disaster 201, 2089

occupation era 25467 investigative 81, 84, 87, 1223, 160,

OECD (Organisation for Economic 164, 1767
Co-operation and Development) pre-auction entry deterrence 50, 94,
1, 5, 11415, 160, 168, 184, 2089 129
Oil Cartel Price-Fixing case 1446 pre-auctions 434, 113
oil shocks 279, 288, 291 precautionary measures 192, 2089,
open auctions 38, 47 214
open procedures 90, 130, 232 predictability 35, 61, 78, 91, 103
open tenders 134, 24950 pressure 137, 159, 169, 181, 183, 254,
opposition parties 280, 282, 285, 289, 261
291 competitive 23, 213, 279
optimal cartel member selection 50, foreign 137, 273, 291
94, 129 Preston, L.E. 18
optimal deterrence 5, 913, 111, 122, price cartels 167, 288
142 price changes 249
optimal enforcement 5, 10, 656 price differences 190, 269
Organisation for Economic Co- price elasticity 23
operation and Development see price fixing 29, 74, 13940, 1446, 151,
OECD 27880, 2934
outcomes 1, 3, 6, 9, 15, 246, 31 price inquiries 130, 247, 252
output 22, 247, 2930, 334, 50, 55, price wars 207, 209, 214
146 prices 1718, 227, 334, 3841, 469,
monopolistic 212 1446, 2812
over-deterrence 76, 144 ceiling 97, 179, 181, 1834
overcapacity 271, 273 clearing 467, 56
overcharges, average cartel 76, 87 competitive 66, 73, 11213, 142
ownership 77, 2578 current 38, 49, 1934
reserve 38, 42, 44, 534, 97, 1023,
parallel conduct 68, 146 1301
parallel price increases 2867 private demand 202, 209
parent companies 778 private enforcement
pay-as-you-bid auctions 467 China 120, 1223, 127
Peltzman, S. 17 EU bid rigging regime 856, 88
Penal Code 11113, 1245, 127 Japan 1478, 1703, 1767, 280, 287
Peoples Republic of China see China and public enforcement 1113
per se illegality of cartels 144, 262, private information 40, 44
265 private law 123, 138, 171, 222, 238,
perfect competition 1415, 19, 25 258
personal scope 148, 220, 222, 2227, private monopolization 138, 142, 149,
2436 1534, 173, 254, 258
politicians 137, 17983, 207, 21011, private parties 12, 84, 88, 118, 120,
273, 279, 291 123, 1723
Porter, R. 43, 45, 502, 57, 59, 128, private sector 36, 157, 181, 193, 201,
213 2034, 2745
post-reform surcharge levels 149 demand 2013, 208
postal services 197, 199, 2267 private-value models 401, 45
potential bidders 46, 51, 534, 100, private values 36, 412
1301, 1334, 179 pro-collusive forces 139, 255, 278, 294
powers 66, 802, 122, 137, 16970, procedures
173, 2745 accelerated 989, 2335

Index 327
dual step 104 public interest criterion 145, 254, 264,

negotiated 90, 94, 98, 22930, 233 266
non-discretionary 93, 108, 216 public law 91, 101, 217, 2223, 225
open 90, 130, 232 public procurement 42, 656, 96104,
restricted 90, 22930 10610, 20810, 21622, 24052
review 95, 106, 238, 241, 261 auctions 59
settlement 845, 87, 159 authorities/entities 2, 14, 323, 35,
single step 90, 104, 107 133, 186, 209
procurement see public procurement defence 2267
procuring entities 32, 947, 12834, Directives 95, 2201, 240
17880, 1824, 21216, 2479 formats 2467, 249
product differentiation 3, 1516, 18, laws/legislation/rules 24, 65, 91,
256, 2930, 34 1001, 107, 11113, 21517
production curtailment China see China, public
recommendations see kankoku procurement, laws
stan EU 21742
productive efficiency 15, 19 applicability 2228
profit, economic 17, 23, 150, 264 substantive rules 22841
profit margins see margins market 109, 234, 249
profit maximization 26, 2930, 274 procedures 90, 104, 111, 2202,
joint 26, 301 2289, 243, 2478
profit maximizing strategies 27, 90 regimes 50, 12830, 132, 135
profitability 14, 1718, 46, 76, 88, 94, tenders see tenders
129 public service contracts 93, 219, 221
profits 1617, 20, 257, 29, 334, 756, public supply contracts 93, 219, 221
282 public tenders 1, 28, 102, 1256, 179,
expected 323, 35, 54, 59, 125, 131 186, 208
extra 556 public works contracts 93, 184, 219,
undue 75, 78, 148, 1512, 156, 176 221, 226
proof 11, 69, 80, 86, 1234, 143, 1712 punishment 910, 113, 11820, 124,
proportionality 93, 21819 147, 1501, 15960
prosecutor, public 86, 160, 169 criminal 148, 176
Province 92, 101, 218, 237, 244 level of 10, 122, 1256, 147, 150,
Public Construction 196, 198, 200, 208 152
public construction demand 195, 197, purchasing formats 128, 2289, 232,
199, 2078 247
public contracts 91, 98, 101, 103,
2267, 2323, 2412 rationalization cartels 2635, 268
public enforcement 11, 858, 157, 170, raw materials 116, 138, 256, 274
176 recession cartels 265, 26870, 280
China 1203, 127 recognition 246, 29, 93, 110, 137,
criminal sanctions 7881 172, 274
EU bid rigging regime 7485 mutual 93, 179, 183, 21819
fines 748 reduction of fines 834
Japan 14870 reforms 137, 140, 14754, 1567,
and private enforcement 1113 2545, 2667, 294
public expenditure 195, 1979 dismantling 254, 294
total 1956, 198 renegades 35, 1045, 107, 1345, 201,
public interest 1445, 223, 262, 271, 207, 209
276 repeated offences 75, 77

reporting duties 2867 second-price 38

Research Institute of Construction and uniform-price 48
Economy (RICE) 185, 1879, sealed bids 42, 133
195, 2089 second collusive agreement 27, 33
research methodology 36 second highest bidder 39
reserve prices 38, 42, 44, 534, 97, second-price sealed-bid auctions 38
1023, 1301 senpakohai relationship 181
reserve value 50, 53 sensitive information 27, 57, 177
resources 12, 32, 35, 82, 85, 87, 161 sequential auctions 39, 52
limited/scarce 32, 71, 84, 185, 212 serious bidders 50, 54, 60, 967,
restraints 139, 278, 294 99100, 1023, 107
substantial 1456 service contracts 2278
unreasonable 144, 146, 149, 154, public 93, 219, 221
156, 265, 288 services 98, 149, 153, 21718, 2256,
retail price maintenance (RPM) 3, 15, 2456, 24852
140, 1534, 255, 264, 278, 280, 293 postal 197, 199, 2267
retaliation 568, 60, 104, 107, 133, settlement procedures 845, 87, 159
182, 21415 side payments 3, 367, 44
revenue 22, 25, 30, 3940, 42, 52, 54 signalling 26, 31, 456, 489, 52, 901,
marginal 212 95
RICE see Research Institute of in-auction 48, 8991, 102, 107, 215
Construction and Economy simultaneous auctions 48, 52, 56
Richard, F. 41, 435, 589 single step procedure 90, 104, 107
Riedel, F. 48 single unit auctions 39, 45, 49, 567
Riley, J. 412, 758, 83, 86 SMEs 170, 187, 199, 2634, 2667,
risk 32, 41, 45, 60, 823, 91, 100 270, 2767
risk averseness 26, 31, 3941, 778 social costs 10, 14, 23, 110, 150, 277
risk-neutral participants 41 socialists 139, 2667, 271
Rittaler, J.B. 19 societal costs 2, 136
rivalry 256, 2930 Spain 913, 101, 21719, 2224,
Robinson, M. 51, 55 2301, 234
RPM see retail price maintenance standard auction types 379
Standard-Conduct-Performance
SAIC see State Authority for Industry paradigm 14, 16, 18
and Commerce standardized goods 249
sanctioning 33, 104, 121, 134 State Authority for Industry and
in-auction 104, 135 Commerce (SAIC) 114, 116, 121,
sanctions 9, 33, 57, 7981, 105, 119, 124
123 state control 226, 279
see also criminal penalties/sanctions static industrial economic analysis
SCAP see Supreme Commander of 21214
Allied Powers static monopoly model 14, 214
scarce resources 32, 71, 84, 185, 212 statistics 5, 157, 165, 168, 179, 186,
Schaede, U. 13840, 25660, 2628, 188
2702, 27580, 286, 28890 enforcement 139, 157, 164, 167, 210,
Scherer, F. 17, 24 272, 278
Schmidt, I.L.O. 19 statutory maximum 75, 78, 878
Schwartz, J. 489, 524 steel 257, 265, 271, 276, 290, 292
sealed-bid auctions Stigler, G.J. 10, 14, 19
closed 46 stockholding restrictions 280, 2823

Index 329
strategic industries 259, 268, 288 tenders 947, 1245, 131, 133, 179,
strategies 31, 434, 467, 49, 946, 2356, 24952
103, 12930 low 221, 228, 23940
bidding 40, 47, 53, 1301 open 134, 24950
inhibition 50, 95, 130 public 1, 28, 102, 1256, 179, 186,
profit maximizing 27, 90 208
Stromquist, W. 41, 45 TFEU see Treaty on the Functioning
structural depression 2889 of the European Union
structural determinants 16, 35, 178 thresholds 72, 220, 2267, 241, 2435
Structure-Conduct-Performance tie-ups 289, 2912
paradigm 14, 16 tort 65, 1424, 1704, 176
subcontracting 934, 100, 103, 1912, tseikai 138, 256
21415, 237, 277 total public expenditure 1956, 198
submissions 58, 114, 129, 1345, 248, trade 29, 67, 701, 1445, 1534,
250, 2523 25960, 265
bid 2, 60, 90, 102, 130 unreasonable restraint of 144, 146,
tender 90, 130, 229 154, 265, 288
submitted prices 1345 trade associations 34, 67, 138, 146,
substantial restraint of competition 171, 180, 183
145 transaction costs 3, 15, 46, 220, 252
Sufrin, B. 68, 701, 734, 118 transfers 434, 124, 159
suppliers 21, 27, 34, 146, 149, 183, 185 transmission 989, 234
eligible 12930, 2489 transparency 91, 93, 1035, 1346,
vertical integrated 27, 34 216, 21920, 235
supplying industries 27, 34, 168, 211 principle 93, 97, 219, 233
Supreme Commander of Allied Powers transport 93, 186, 191, 207, 219, 221,
(SCAP) 1389, 169, 255, 25863, 2267
269, 279, 294 Treaty on the Functioning of the
surcharges 139, 14754, 156, 1601, European Union (TFEU) 6673,
176, 21011, 282 79, 85, 117, 227
applicable 149, 153 treble/triple damages 114, 11920, 123,
enforcement 148, 150 138, 172, 258
levels 1489, 1514, 156 turnover 71, 747, 100, 118, 126,
system 148, 1502, 156, 168, 170, 1989, 2034
176
Suzuki, K. 151, 1579 Uesugi, A. 139, 1456, 152, 169,
2634, 277, 2878
tacit collusion 478, 53, 213 uncertainty 401, 58, 60, 778, 83,
Tan, G. 45 131, 135
telecommunications 1589, 221, 2267 unconcentrated industries 17
tenderers 90, 94, 96, 2345, 23940, under-deterrence 63, 75, 778, 858,
252 119, 123, 1767
diligent 105, 238 unfair bets 41
tendering unfair business practices 96, 264, 266
authorities 49, 90, 94, 107, 212, 215, unfair competition 11314, 264
227 unfair trade practices 140, 1467, 149,
collusive 73, 124 153, 159, 171, 278
entities 91, 94, 102 uniform-price auctions 468, 56
procedures 90, 95, 978, 106, 228, ascending clock 478
233, 23940 sealed-bid 48

United States 137, 144, 151, 154, 159, whistle blowers 834, 160
169, 190 wholesalers 153, 279, 282
Department of Justice 151, 1545 Wilner, B.S. 49
unjust enrichment 86, 144 Wils, W. 802
unjust low price sales 1534 Wilson, T.A. 18, 41
unreasonable restraints 144, 146, 149, winner determination 8994, 1289
154, 156, 265, 288 winner selection criteria 105, 1345
ura jointo 182 winners 434, 49, 55, 578, 60, 91, 99
winning bidders 389, 59, 104, 134
valuations 40, 45, 501 winning bids 57, 113, 179, 2523
bidders 3940 withdrawals 95, 103, 107, 228, 2401
values 278, 3940, 445, 53, 589, Wolfstetter, E. 39, 48
153, 2267 Woodall, B. 179, 1812
private 36, 412 workload 1645
Van de Walle, S. 1434, 1724 World Trade Organization (WTO) 1,
Vernon, J. 21, 246, 2930 110
vertical agreements 71, 73
vertical integration 16, 27, 34 x-inefficiency 234, 185, 190, 210,
vertical restraints 164 2734
Vickrey, W. 389, 42, 445, 478, 51,
56 Yamada, A. 151, 158, 166, 172
Vickrey auctions 38, 47, 49 Yamamura, K. 13840, 256, 2603,
victims 12, 43, 856, 120 26574, 2778
Viscusi, W.K. 21, 246, 2930 Ye, L. 59
Wakui, M 1446, 161, 172 zaibatsu 138, 254, 2568, 266

water 93, 219, 221, 2267, 285 Zemsky, P. 42, 45
Weber, R. 412, 47, 49 Zona, D. 43, 59, 213

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Cartels, Competition and Public Procurement

WEISHAAR 9780857936745 PRINT (M3109).indd i 28/03/2013 16:48

WEISHAAR 9780857936745 PRINT (M3109).indd ii 28/03/2013 16:48

NEW HORIZONS IN COMPETITION LAW AND ECONOMICS

WEISHAAR 9780857936745 PRINT (M3109).indd iii 28/03/2013 16:48

All rights reserved. No part of this publication may be reproduced, stored in a

Edward Elgar Publishing, Inc.

A catalogue record for this book

Library of Congress Control Number: 2012951754

This book is available electronically in the ElgarOnline.com

ISBN 978 0 85793 674 5

Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

WEISHAAR 9780857936745 PRINT (M3109).indd iv 28/03/2013 16:48

WEISHAAR 9780857936745 PRINT (M3109).indd v 28/03/2013 16:48

PART 1 ECONOMIC THEORY

2. Economic theory on optimal deterrence and enforcement 9

4. Auction theory and collusion 36

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PART 2 LEGAL ANALYSIS

6. Application of auction theory in Europe 89

8. Application of auction theory in China 128

WEISHAAR 9780857936745 PRINT (M3109).indd viii 28/03/2013 16:48

2. Chinese public procurement laws and cartel formation 128

10. The Japanese construction sector 178

11. Limits of economic theories and concluding remarks 212

Appendix 1: Europe an overview of public procurement law 217

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4.2 Rules on advertising and transparency 232

Appendix 2: China an overview of public procurement law 243

Appendix 3: History of Japanese antitrust legislation 254

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Well-organized public procurements have become more important in recent

It bears mentioning, however, that such a conceptualization is by no

1See, for example, OECD (2009).

WEISHAAR 9780857936745 PRINT (M3109).indd 1 28/03/2013 16:48

information asymmetry that characterizes violations in the area of compe-

5 European Commission (2004), 5.

also to state behaviour and state aid.

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2. RESEARCH METHODOLOGY AND OUTLINE OF

8 See Shughart II (1990), 1.

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to reveal. In the context of public biddings, auction theory can be used to

WEISHAAR 9780857936745 PRINT (M3109).indd 4 28/03/2013 16:48

gering 78 per cent).12 Despite these enforcement successes, the legislator

12 OECD (2008), 67.

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WEISHAAR 9780857936745 PRINT (M3109).indd 6 28/03/2013 16:48

WEISHAAR 9780857936745 PRINT (M3109).indd 7 28/03/2013 16:48

1 Becker (1968), 169217.

WEISHAAR 9780857936745 PRINT (M3109).indd 9 28/03/2013 16:48

Effective enforcement policies thus deter violations if they increase

liability of managers, rather than a monetary amount that could be reimbursed to

see Stigler (1970), 529.

WEISHAAR 9780857936745 PRINT (M3109).indd 10 28/03/2013 16:48

imprisonment,11 it should be remembered that the offenders ability to pay

2. CRIMINAL VERSUS ADMINISTRATIVE

Administrative procedures are generally considered to be time-efficient,

3. PRIVATE VERSUS PUBLIC ENFORCEMENT

11 See Polinsky and Shavell (1984), 98.

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