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 free market, competitive bidding. 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 United States.

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 with a 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 by soliciting competitive bids. Examples include construction projects and government procurement contracts as well as auctions for 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 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 for 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 being the winning bidder.
  • Bid suppression: Bid suppression occurs when one (or more) bidder(s) sits out of the bidding so that 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

Three school bus companies form 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 so the three companies could avoid having to compete with one another, and instead divide up the territory among themselves.

What’s the Difference Between Bid Rigging and Price Fixing?

Bid rigging occurs when bidders on a contract conspire together to manipulate the outcome of a bidding process in their favor. Price fixing, on the other hand, is an agreement between competitors to raise or fix the price they sell their products and services for.

Both of these practices are illegal, violate the Sherman Act, and can be punishable by a fine of up to $100 million, 10 years’ imprisonment—or both.

Why Is Bid Rigging Illegal?

Bid rigging undermines the bidding process and often leads victims of the scheme to lose money. In the case of public contracts, prices are driven up and the taxpayer is left footing the bill. Meanwhile, as far as car or property auctions are concerned, bid rigging frequently results in the culprit getting a bargain and the victim getting paid less.

What Are Some Common Methods of Bid Ridding?

Bid ridding can take many forms. Companies may conspire to abstain from bidding completely or intentionally submit uncompetitive bids that pave the way for one of their partners in crime to win on favorable terms.