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Home , Collusion, Contract, Price fixing

FIXING, , AND MARKET ALLOCATION SCHEMES: WHAT THEY ARE AND WHAT TO LOOK FOR

An Antitrust Primer

1 Introduction enduring pieces of economic . American consumers have the right to The Sherman Act prohibits any agreement This primer briefly expect the benefits of free and open among competitors to fix , rig bids, describes the most — the best goods and or engage in other anticompetitive common antitrust services at the lowest prices. Public and activity. Criminal prosecution of Sherman violations and outlines those private often rely on a Act violations is the responsibility of the conditions and competitive bidding process to achieve Antitrust Division of the events that that end. The competitive process only Department of . Violation of the indicate works, however, when competitors set Sherman Act is a punishable by, anticompetitive . prices honestly and independently. When for , a fine of up to $100 competitors collude, prices are inflated million, and for individuals, a fine of up and the customer is cheated. , to $1 million or 10 years’ imprisonment bid rigging, and other forms of collusion (or both). are illegal and are subject to criminal Under some circumstances, the prosecution by the Antitrust Division of maximum potential fine may be increased the United States Department of Justice. above the Sherman Act maximums to In recent years, the Antitrust Division twice the gain or loss involved. In has successfully prosecuted regional, addition, collusion among competitors national, and international conspiracies may constitute violations of the mail or affecting , agricultural wire , the false statements products, manufacturing, service statute, or other federal felony , all industries, consumer products, and many of which the Antitrust Division other sectors of our economy. Many of prosecutes. these prosecutions resulted from In addition to receiving a criminal information uncovered by members of the sentence, a or individual general public who reported the convicted of a Sherman Act violation may information to the Antitrust Division. be ordered to make to the Working together, we can continue the victims for all overcharges. Victims of effort to protect and promote free and bid-rigging and price-fixing conspiracies open competition in the market-places of also may seek civil recovery of up to three America. times the amount of suffered.

Federal Antitrust Enforcement Forms of Collusion Enacted in 1890, the Sherman Act is Most criminal antitrust prosecutions among our country’s most important and involve price fixing, bid rigging, or

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market division or allocation schemes. • Establish or adhere to price discounts. Each of these forms of collusion may be • Hold prices firm. prosecuted criminally if they occurred, at • Eliminate or reduce discounts. least in part, within the past five years. • Adopt a standard formula for Proving such a does not require us computing prices. to show that the conspirators entered into • Maintain certain price differentials a formal written or express agreement. between different types, sizes, or Price fixing, bid rigging, and other quantities of products. collusive agreements can be established • Adhere to a minimum fee or price A corporation or individual either by direct , such as the schedule. convicted of a of a participant, or by • Fix credit terms. Sherman Act circumstantial evidence, such as • Not advertise prices. violation may be suspicious bid patterns, travel and In many cases, participants in a price- ordered to make restitution to the expense reports, telephone records, and fixing also establish some type victims for all diary entries. of policing mechanism to make sure that overcharges. Under the , price-fixing and bid- everyone adheres to the agreement. Victims of bid- rigging and rigging schemes are per se violations of Bid Rigging price-fixing the Sherman Act. This means that where Bid rigging is the way that conspiring conspiracies also such a collusive scheme has been competitors effectively raise prices where may seek civil established, it cannot be justified under recovery of up to purchasers — often federal, state, or local three times the the law by arguments or evidence that, for governments — acquire goods or services amount of example, the agreed-upon prices were by soliciting competing bids. damages reasonable, the agreement was necessary Essentially, competitors agree in suffered. to prevent or eliminate price cutting or advance who will submit the winning bid ruinous competition, or the conspirators on a being let through the were merely trying to make sure that each competitive bidding process. As with got a fair share of the market. price fixing, it is not necessary that all Price Fixing bidders participate in the conspiracy. Price fixing is an agreement among Bid rigging also takes many forms, competitors to raise, fix, or otherwise but bid-rigging conspiracies usually fall maintain the price at which their goods or into one or more of the following services are sold. It is not necessary that categories: the competitors agree to charge exactly Bid Suppression: In bid suppression the same price, or that every competitor in schemes, one or more competitors who a given industry join the conspiracy. Price otherwise would be expected to bid, or fixing can take many forms, and any who have previously bid, agree to refrain agreement that restricts price competition from bidding or withdraw a previously violates the law. Other examples of price- submitted bid so that the designated fixing agreements include those to:

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winning competitor’s bid will be illegally obtained higher price between accepted. them. Complementary Bidding: Almost all forms of bid-rigging Complementary bidding (also known as schemes have one thing in common: an “” or “courtesy” bidding) occurs agreement among some or all of the when some competitors agree to submit bidders which predetermines the winning bids that either are too high to be accepted bidder and limits or eliminates or contain special terms that will not be competition among the conspiring acceptable to the buyer. Such bids are not vendors. intended to secure the buyer’s acceptance, Market Division but are merely designed to give the Market division or allocation schemes appearance of genuine competitive are agreements in which competitors bidding. Complementary bidding schemes divide markets among themselves. In such are the most frequently occurring forms of schemes, competing firms allocate bid rigging, and they defraud purchasers specific customers or types of customers, by creating the appearance of competition products, or territories among themselves. to conceal secretly inflated prices. For example, one competitor will be Bid Rotation: In bid rotation allowed to sell to, or bid on let schemes, all conspirators submit bids but by, certain customers or types of take turns being the low bidder. The terms customers. In return, he or she will not of the rotation may vary; for example, sell to, or bid on contracts let by, competitors may take turns on contracts customers allocated to the other according to the size of the contract, competitors. In other schemes, allocating equal amounts to each competitors agree to sell only to conspirator or allocating volumes that customers in certain geographic areas and correspond to the size of each conspirator refuse to sell to, or quote intentionally company. A strict bid rotation pattern high prices to, customers in geographic defies the law of chance and suggests areas allocated to conspirator companies. collusion is taking place. Subcontracting: Subcontracting Detecting Bid Rigging, Price Fixing, arrangements are often part of a bid- And Other Types of Collusion rigging scheme. Competitors who agree Bid rigging, price fixing, and other not to bid or to submit a losing bid collusion can be very difficult to detect. frequently receive subcontracts or supply Collusive agreements are usually reached contracts in exchange from the successful in secret, with only the participants low bidder. In some schemes, a low having knowledge of the scheme. bidder will agree to withdraw its bid in However, suspicions may be aroused by favor of the next low bidder in exchange unusual bidding or patterns or for a lucrative subcontract that divides the something a vendor says or does.

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Bid or Price Patterns • Prices stay identical for long Certain patterns of bidding or pricing periods of time. conduct seem at odds with a competitive • Prices previously were market and suggest the possibility of different. collusion: • Price increases do not appear Bids to be supported by increased • The same company always wins a costs. particular . This may • Discounts are eliminated, be more suspicious if one or more especially in a market where companies continually submit discounts historically were given. unsuccessful bids. • Vendors are charging higher • The same suppliers submit bids prices to local customers than to and each company seems to take distant customers. This may a turn being the successful bidder. indicate local prices are fixed. • Some bids are much higher than Suspicious Statements or Behavior published price lists, previous While vendors who collude try to bids by the same firms, or keep their arrangements secret, occasional engineering cost estimates. slips or carelessness may be a tip-off to • Fewer than the normal number of collusion. In addition, certain patterns of competitors submit bids. conduct or statements by bidders or their • A company appears to be bidding employees suggest the possibility of substantially higher on some bids collusion. Be alert for the following than on other bids, with no situations, each of which has triggered a apparent cost differences to successful criminal antitrust prosecution: account for the disparity. • The proposals or bid forms submitted • Bid prices drop whenever a new by different vendors contain or infrequent bidder submits a irregularities (such as identical bid. calculations or spelling errors) or • A successful bidder subcontracts similar handwriting, typeface, or work to competitors that stationery. This may indicate that the submitted unsuccessful bids on designated low bidder may have the same project. prepared some or all of the losing • A company withdraws its vendor’s bid. successful bid and subsequently is • Bid or price contain subcontracted work by the new whiteouts or other physical alterations winning contractor. indicating last-minute price changes. Prices • A company requests a bid package for • Identical prices may indicate a itself and a competitor or submits price-fixing conspiracy, both its and another’s bids. especially when:

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• A company submits a bid when it is exist. Thus, indicators of collusion merely incapable of successfully performing call for further investigation to determine the contract (likely a complementary whether collusion exists or whether there bid). is an innocent explanation for the events • A company brings multiple bids to a in question. bid opening and submits its bid only Collusion is more after determining (or trying to Conditions Favorable to Collusion likely to occur if determine) who else is bidding. While collusion can occur in almost there are few sellers. The fewer • A bidder or salesperson makes: any industry, it is more likely to occur in the sellers, the • Any reference to industry-wide or some industries than in others. An easier it is for association price schedules. indicator of collusion may be more them to get • meaningful when industry conditions are together and Any statement indicating advance agree on prices, (non-public) knowledge of already favorable to collusion. bids, customers, competitors’ pricing. • Collusion is more likely to occur if or territories. • Statements to the effect that a there are few sellers. The fewer the particular customer or contract number of sellers, the easier it is for “belongs” to a certain vendor. them to get together and agree on • Statements that a bid was a prices, bids, customers, or territories. “courtesy,” “complementary,” Collusion may also occur when the “token,” or “cover” bid. number of firms is fairly large, but • Any statement indicating that vendors there is a small group of major sellers have discussed prices among and the rest are “fringe” sellers who themselves or have reached an control only a small fraction of the understanding about prices. market. A Caution About Indicators of • The probability of collusion increases Collusion if other products cannot easily be While these indicators may arouse substituted for the product in question suspicion of collusion, they are not or if there are restrictive of collusion. For example, bids that come specifications for the product being in well above the estimate may indicate procured. collusion or simply an incorrect estimate. • The more standardized a product is, Also, a bidder can lawfully submit an the easier it is for competing firms to intentionally high bid that it does not reach agreement on a common price think will be successful for its own structure. It is much harder to agree independent business reasons, such as on other forms of competition, such being too busy to handle the work but as design, features, quality, or service. wanting to stay on the bidders’ list. Only • Repetitive purchases may increase the when a company submits an intentionally chance of collusion, as the vendors high bid because of an agreement with a may become familiar with other competitor does an antitrust violation bidders and future contracts provide

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the opportunity for competitors to Antitrust Division needs your help in share the work. uncovering them and bringing them to our Antitrust violations • Collusion is more likely if the attention. are serious competitors know each other well If you think you have a possible that can cost a through social connections, violation or just want more information company hundreds of millions of associations, legitimate business about what we do, contact the Citizen dollars in fines and contacts, or shifting from Complaint Center of the Antitrust can send an one company to another. Division: to jail • Bidders who congregate in the same E-mail: for up to ten years. building or town to submit their bids [email protected] These conspiracies have an easy opportunity for last- Phone: are by their nature minute communications. 1-888-647-3258 secret and difficult (toll-free in the U.S. and ); or to detect. What You Can Do 1-202-307-2040 The Antitrust Antitrust violations are serious crimes Address: Division needs that can cost a company hundreds of Citizen Complaint Center your help in millions of dollars in fines and can send Antitrust Division, U.S. Dept. of Justice uncovering them and bringing them an executive to jail for up to ten years. 950 Pennsylvania Ave. NW, Suite 3322 to our attention. These conspiracies are by their nature Washington, DC 20530 secret and difficult to detect. The

1 This Primer offers the views of the Antitrust Division of the Department of Justice and has no force or effect of law. It is not intended to, does not, and may not be relied upon to create any , substantive or procedural, enforceable at law by any party in any matter civil or criminal. Nothing in this should be construed as mandating a particular in any specific case, and nothing in this document limits the discretion of the U.S. Department of Justice or any U.S. government agency to take any action, or not to take action, with respect to matters under its . This Primer was originally published in September 2005. It was revised in February 2021.

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