Bid rigging is an illegal practice in which competing parties collude to choose the winner of a bidding process while others submit uncompetitive bids. Bid rigging stifles free-market competition, as the rigged price will be higher than what might have resulted from a competitive bidding process. As such, bid rigging is harmful to consumers and taxpayers who bear the cost of higher prices and procurement costs. The Sherman Antitrust Act of 1890 makes bid rigging illegal under U.S. antitrust law. Bid rigging is a felony in the U.S. punishable by fines, imprisonment, or both. It is also illegal in a majority of countries as a form of market manipulation.
Breaking Down Bid Rigging
According to the U.S. Federal Trade Commission, bid rigging can take many forms, though the most common by far is when companies decide in advance who will win a bidding process. Companies may take turns being a low bidder, one company may decide to not submit a bid, or may submit uncompetitive bids to manipulate the process. Bid rigging may also entail a conspiracy that involves using a competing company as a subcontractor to subvert the bidding process or forming a joint venture with the sole purpose of submitting a single bid rather than achieving savings by combining resources or expertise.
Bid rigging can be found in auctions for cars and homes, construction projects, government procurement contracts, and nearly any industry that seeks to make sales by engaging in a bidding process. The FTC provides a tip sheet for procurement officers to help them identify bid rigging and when to notify regulators.
Bid Rigging Types
There are several types of bid rigging, some of which may be used in tandem:
- Bid rotation: When bidders take turns at being the winning bidder, a form of market allocation.
- Bid suppression: When some bidder sit out of a bidding process so another party can win a bid.
- Complementary bidding: When uncompetitive bids are made to ensure that a certain bidder is selected. Also called "courtesy bidding" or "cover bidding."
- Phantom bidding: Employed in auctions to compel legitimate bidders to bid higher than they normally would.
- Buyback: A fraudulent practice in no-reserve auctions when a seller buys the auction item to prevent it from selling at too low a price.
Bid Rigging Example
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 secret meetings to pick winning and losing bids for orders in which winners rotated based on phases of the moon. It was uncovered by the Tennessee Valley Authority upon reviewing identical bids over many years in what were meant to be secret bidding processes. It resulted in fines and jail terms for companies and individuals involved.