What Is Bid Rigging?

Bid rigging is an illegal practice in which competing parties collude to determine the winner
of a bidding process. Bid rigging is a form of anticompetitive collusion and is an act of
market manipulation; when bidders coordinate, it undermines the bidding process and can
result in a rigged price that is higher than what might have resulted from a free market,
competitive bidding process. Bid rigging can be harmful to consumers and taxpayers who
may be forced to bear the cost of higher prices and procurement costs.

The Sherman Antitrust Act of 1890 made the act of bid rigging punishable by U.S. law. Bid rigging is a
felony punishable by fines, imprisonment, or both. It is also illegal in the majority of other countries
outside the U.S.

Key Takeaways

 Bid rigging is an illegal practice in which competing parties collude to determine the winner
of a bidding process.
 When bidders coordinate, it undermines the bidding process and can result in a rigged price
that is higher than what might have resulted from a free market, competitive bidding
process.
 Bid rigging practices can be present in an industry where business contracts are awarded
through the process of soliciting competitive bids, such as auctions for cars and homes,
construction projects, and government procurement contracts.

Understanding Bid Rigging

Bid rigging practices can be present in an industry where business contracts are awarded
through the process of soliciting competitive bids. As such, bid rigging can occur in auctions
for cars and homes, construction projects, and government procurement contracts. Although
bid rigging can take many different forms, one of the most common practices of bid rigging
occurs when companies decide in advance who will win a bidding process. In order to
execute this, companies may take turns submitting the lowest bid, a company may decide to
abstain from bidding altogether, or companies may intentionally submit uncompetitive bids
as a way of manipulating the outcome and making sure the predetermined bidder wins.
Another practice of bid rigging involves hiring a competing company as a subcontractor in
order to subvert the bidding process. A company may also decide to form a joint venture with
a competing company, but do this with the sole purpose of submitting a single bid, and
without any intention of working together with the other company to achieve savings by
combining resources or expertise.

Some forms of bid rigging can be categorized more broadly:

 Bid rotation: Bid rotation is a form of market allocation and occurs when bidding companies
take turns at being the winning bidder.
 Bid suppression: Bid suppression occurs when one (or more) bidder(s) sit out of a bidding
process so another party is guaranteed to win a bidding process.
 Complementary bidding: Complementary bidding occurs when companies intentionally
submit uncompetitive bids as a way of guaranteeing that their bid is not selected and
helping to ensure that another, preselected bidder is chosen. This is also called courtesy
bidding or cover bidding.
  Phantom bidding: Phantom bidding is employed in auctions as a way of compelling
legitimate bidders to bid higher than they normally would.
 Buyback: Buyback is a fraudulent practice used in no-reserve auctions where the seller of an
item buys the auction item to prevent it from selling at too low a price.

Example of Bid Rigging

For example, suppose there are three school bus companies that formed a joint venture in
order to provide transportation services to a school district through a single contract. When
the Federal Trade Commission (FTC) investigated the operations of the three companies, it
found that they were not achieving any savings by combining their resources or prior
expertise. The investigation revealed that the only purpose for forming the joint venture was
to prevent the school bus companies from offering competing bids.

Bidding Ring
What is a Bidding Ring

A bidding ring is a group of individuals or businesses that collude to keep low the prices of
assets for sale at auction by not bidding against each other. Bidding rings are a form
of collusion to help each member obtain the best price to the exclusion of non-members.
Members of a bidding ring profit by winning auction items at suppressed prices in the legal,
public auction and then re-auctioning them later in a private auction made up of the bidding
ring members. The ring's members share in the profits from the private auction. It is illegal to
participate in a bidding ring. As such, the seller of any item targeted by a bidding ring has the
right to invalidate any auction results. A bidding ring is also known as a "bid
ring," an "auction ring" or a "bidding pool."

BREAKING DOWN Bidding Ring

Bidding rings are most commonly found in auctions in which each bidder knows the identity
of other bidders. Such public auctions increase the chance that a bidding ring will form.
Bidding rings agree to bid against only the bidders that are not part of the ring. Such behavior
weakens competition and suppresses prices. Bidding rings may also be employed to prop up
the price of an auction item. Such a practice involves a dummy bid made by a bidder who has
no good-faith intention to win the bidding process but is instead making an attempt to
force other bidders to pay more for an item. A dummy bid is also known as a "shill" bid and
is illegal, though some bids that are made below a reserve price are not — especially if that
price has been disclosed.

Bidding Ring vs. Cartels (and Bid Rigging)

Members of a cartel work together (collude) in order to limit competition with the hope that
this will increase the profits of each of the members. Such actions frequently involve bid
rigging, in which cartel members collude to limit competition and keep prices for their goods
or services high. Cartels maybe found in the procurement of goods and services. For
example, a group of paper suppliers may divide up local municipalities
among themselves and agree not to bid against each other for government paper contracts.
This has the effect of allowing the individual members the ability to set higher contract
prices. Another option would be to have a group of businesses agree to rotate when bidding
for contracts, with some members participating in the contract bidding and others not
participating at all.

In order for a cartel to function properly, the members must determine how to: divide the
gains made from their activities, set rules for enforcing the agreement not to compete, limit
membership and keep the cartel’s actions secret. Like in a cartel, maintaining a bidding ring
can be difficult if a large number of members are participating. According to game theory,
each member of the bidding ring or cartel has an incentive to cheat in certain scenarios,
which will allow the cheating member to obtain a greater proportion of the benefit.

Bidding Rings and Regulation

Bidding rules for auctions differ depending on the jurisdiction, but most forbid bidding rings
and dummy bids. Countries that do not forbid bidding rings note that such actions that lead to
anything but a genuine bid may have an adverse effect on the reputation of an auction house.
This gives auctioneers significant incentive to identify and curtail bid rigging.

Regulators attempt to break up bidding rings by examining the parties that participate in
auctions, and how their bids vary over time. One option is to attempt to predict which parties
may participate in a bidding ring, and then compare this group to a baseline of non-colluding
participants.

Price Rigging
What Is Price Rigging?

Price rigging is an illegal action that occurs when parties conspire to fix or inflate prices to
achieve higher profits at the expense of the consumer. Also known as "price fixing" or
"collusion," price rigging can take place in any industry. Cases of price rigging may be
prosecuted under the antitrust laws of several different countries, as it runs contrary to natural
market forces (such as supply and demand). It has the effect of dampening competition,
which tends to favor the consumer with greater variety and lower prices.

Price rigging is a form of market manipulation. As a term, "price rigging" is most commonly used in
British English, while "price fixing" is more common in North America.

Key Takeaways

 Price rigging is also known as price fixing or collusion and is not limited to one type of
industry.
 It is a form of market manipulation used mostly in British English.
 In the U.S., the Sherman Antitrust Act prohibits price rigging.

How Price Rigging Works

While most cases of price rigging involve a conspiracy to keep prices as high as possible, is
may also be employed to keep prices stable, fix them, or discount them. Price rigging may
take many forms: manufacturers and sellers may seek to set pricing floors, agree to a
common minimum price or book price, limit discounting or markups, agree to impose or limit
similar surcharges, or carve up territories or customer bases to limit competition within them.
Price rigging is tolerated in certain businesses and locales.

Example of Price Rigging

Price rigging may be found in a variety of industries, though it is not always illegal. Airline
ticket prices and oil prices are fixed by the IATA and OPEC, respectively, for example.

 Music companies were found to have engaged in illegal practices (such as minimum
advertised prices) to inflate or fix the prices of compact discs in 1995-2000 to fight discount
retailers.
 In the 1950s, manufacturers General Electric and Westinghouse conspired to fix prices for
industrial products in a case that involved both price rigging and bid rigging, as well as secret
meetings to pick winning and losing bids for orders in which winners rotated based on
phases of the moon.

 Price rigging may be used by traders to artificially inflate the price of a stock to lure
in more investors. As new investors buy up shares, share prices increase in value until
the manipulators sell off, which causes share prices to collapse. OTC Bulletin Board
shares, also known as penny stocks, are especially vulnerable to price rigging.

Price Rigging and Regulation

 In the United States, price rigging is defined and prohibited in the Sherman Antitrust
Act (of 1890) as a federal offense. The Federal Trade Commission has jurisdiction
over civil price fixing cases, and some states also prosecute price rigging antitrust
cases, but most regulation is by the United States Department of Justice.

 In Canada, price rigging is a criminal act under Section 45 of the Competition Act. In
the United Kingdom, the Office of Fair Trading regulates price rigging, which has
been approved for the distribution of newspapers and magazines (retailers who sell
periodicals below their cover price may have their supply cut off).