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 may be 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.