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Price Fixing, Bid Rigging, and Market Allocation Schemes: What They Are and What to Look For

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Price Fixing, Bid Rigging, and Market Allocation Schemes: What They Are and What to Look For PRICE FIXING, BID RIGGING, AND MARKET ALLOCATION SCHEMES: WHAT THEY ARE AND WHAT TO LOOK FOR An Antitrust Primer 1 Introduction enduring pieces of economic legislation. 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 prices, rig bids, describes the most competition — 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 organizations often rely on a Act violations is the responsibility of the conditions and competitive bidding process to achieve Antitrust Division of the United States events that that end. The competitive process only Department of Justice. Violation of the indicate works, however, when competitors set Sherman Act is a felony punishable by, anticompetitive collusion. prices honestly and independently. When for corporations, a fine of up to $100 competitors collude, prices are inflated million, and for individuals, a fine of up and the customer is cheated. Price fixing, 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 construction, agricultural wire fraud statute, the false statements products, manufacturing, service statute, or other federal felony statutes, 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 corporation or individual general public who reported the convicted of a Sherman Act violation may information to the Antitrust Division. be ordered to make restitution 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 damages 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 1 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 crime 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 evidence, such as the schedule. convicted of a testimony 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 conspiracy also establish some type victims for all business diary entries. of policing mechanism to make sure that overcharges. Under the law, 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 contract 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: 2 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 “cover” 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 contracts 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 pricing patterns or for a lucrative subcontract that divides the something a vendor says or does. 3 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 procurement. 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
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