What is bid rigging?
Bid rigging is an illegal practice in which competing parties collude to determine the winner of the bidding process. Bid rigging is a form of anti-competitive collusion and is an act of market manipulation; When bidders coordinate, it undermines the bidding process and can result in a rigged price that may exceed the result of free market, competitive bidding. Bid rigging can be detrimental to consumers and taxpayers, who may be forced to bear the cost of higher prices and purchase costs.
The Sherman Antitrust Act of 1890 made the act of bid rigging punishable by US law. Bid falsification is an offense punishable with fine, imprisonment or both. It is also illegal in most other countries outside the United States.
- Bid rigging is an illegal practice in which competing parties collude to determine the winner of the bidding process.
- When bidders coordinate, it weakens the bidding process and can result in a rigged price that can result from a free market with a competitive bidding process.
- Bid rigging practices may exist in an industry where business contracts are awarded through the process of soliciting competitive bids, such as car and home auctions, construction projects, and government purchase contracts.
Understanding bid rigging
Bid rigging practices may exist in an industry where business contracts are awarded by soliciting competitive bids. Examples include construction projects and government purchase contracts as well as auctions of cars and homes.
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 in a bidding process. To perform this, companies may submit the lowest bid, a company may decide to abstain from bidding altogether, or companies may knowingly manipulate the result as a way to ensure the winning of the predetermined bidder. may submit non-competitive bids.
Another practice of bid rigging involves hiring a competing company as a subcontractor to reverse the bidding process. A company may decide to form a joint venture with a competing company for the sole purpose of submitting a single bid, and has no intention of working closely with another company to gain savings from a combination of resources or expertise .
Some forms of dialect rigging can be more broadly classified as:
- bid rotationBid rotation: Bid rotation is a form of market allocation and occurs when the bidding companies become the winning bidders.
- bid suppressionBid Suppression: Bid suppression occurs when one (or more) bidders sit out of bidding so that another party is guaranteed to win the bidding process.
- supplementary bidComplementary bidding occurs when companies intentionally submit uncompetitive bids as a guarantee that their bid is not selected and to help ensure that another pre-selected bidder is selected. It is also called courtesy bidding or cover bidding.
- phantom quotePhantom bidding is employed in an auction as a way of forcing legitimate bidders to bid higher than usual.
- buy backBuyback: A fraudulent practice used in unreserved auctions where the seller of an item buys the auctioned item to prevent it from selling at a very low price.
example of bid rigging
Three school bus companies form a joint venture 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 receiving any savings from combining their resources or prior expertise. The investigation revealed that the sole purpose of forming the joint venture was so that the three companies could avoid competing with each other, and instead split the territory among themselves.
What is the difference between bid rigging and pricing?
Bid rigging occurs when bidders on a contract work together to manipulate the outcome of the bidding process in their favor. Pricing, on the other hand, is an agreement between competitors to raise or fix the price of their products and services sold by them.
Both of these practices are illegal, violate the Sherman Act, and can be punishable by fines of up to $100 million, 10 years in prison, or both.
Why is bid rigging illegal?
Bid rigging weakens the bidding process and often results in loss of money to the victims of the scheme. In the case of public contracts, the prices go up and the taxpayer skips the bill. Meanwhile, as far as the auction of a car or property is concerned, bid rigging often results in the offender getting the deal and the victim getting paid less.
What are some common ways to bid free?
Free bidding can take many forms. Companies may conspire to abstain from bidding outright or may knowingly submit uncompetitive bids that pave the way for one of their partners in crime to win on favorable terms.