Bid Rigging

Definition

The term bid rigging is used to describe an agreement between competitors as to who will submit the winning bid when a company solicits proposals to purchase goods or services.  In a bid rigging scheme, competitors will collude so the winning bidder will receive a contract for goods or services that results in profit margins that are higher than under a truly competitive structure.

Bid rigging is illegal in many countries, and may also be considered a criminal offense in the United States under antitrust laws.

Explanation

Bid rigging oftentimes occurs when a company issues a request for proposal for the supply of goods or services.  In these schemes, "competitive" bidders agree in advance who is going to submit the winning bid.  Generally, bid rigging falls into the following categories:

  • Complementary Bids:  occurs when one or more competitors submit bids that fail to address all of the requirements in the contract or provide bids that are high.
  • Bid Rotation: occurs when competitors agree to submit bids, but take turns being the low bidder.  Bid rotation typically occurs when a series of contracts will be awarded.
  • Bid Suppression:  occurs when one or more competitors withdraw bids or fail to submit a bid.

These types of arrangements all have one common theme:  the purchasing company awards a contract to a bidder that is providing a higher price than that found in a truly competitive market.  When the schemes involve complementary bids or suppression, those competitors that agree not to bid, or submit "uncompetitive" bids, do so with the understanding they will be awarded subcontracts from the successful bidder.  In the case of bid rotation, competitors can achieve abnormally high profits when it's their turn to win a contract.

In addition to bid rigging, anti-competitive practices may include dividing markets, boycotts, disparagement, dumping, exclusive dealing, price fixing, tying, as well as the unethical collection of business intelligence.

Anti-competitive laws in the United States were passed to promote fair competition for the benefit of consumers.  This includes a collection of both federal and state laws that are an extension of antitrust laws such as the Sherman Antitrust Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914.

Related Terms

anti-competitive practice, confidentiality agreement, conflict of interest, dividing markets, price fixing, group boycott, disparagement, dumping, exclusive dealing, tying arrangements, Sherman Antitrust Act of 1890, Clayton Antitrust Act of 1914, limit pricing, Federal Trade Commission Act of 1914, resale price maintenance