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Quick Abnormal-Bid-Detection Method for Construction Contract Auctions Loughborough University Institutional Repository Quick abnormal-bid-detection method for construction contract auctions This item was submitted to Loughborough University's Institutional Repository by the/an author. Citation: BALLESTEROS-PEREZ, P. ...et al., 2015. Quick abnormal-bid- detection method for construction contract auctions. Journal of Construction Engineering and Management, 141(7): 04015010 Additional Information: • This is an Open Access Article. It is published by Asce under the Creative Commons Attribution 4.0 Unported Licence (CC BY). Full details of this licence are available at: http://creativecommons.org/licenses/by/4.0/ Metadata Record: https://dspace.lboro.ac.uk/2134/32767 Version: Published Publisher: Asce Rights: This work is made available according to the conditions of the Creative Commons Attribution 4.0 International (CC BY 4.0) licence. Full details of this licence are available at: http://creativecommons.org/licenses/ by/4.0/ Please cite the published version. Quick Abnormal-Bid-Detection Method for Construction Contract Auctions Pablo Ballesteros-Pérez1; Martin Skitmore2; Raj Das3; and Maria Luisa del Campo-Hitschfeld4 Abstract: Noncompetitive bids have recently become a major concern in both public and private sector construction contract auctions. Consequently, several models have been developed to help identify bidders potentially involved in collusive practices. However, most of these models require complex calculations and extensive information that is difficult to obtain. The aim of this paper is to utilize recent developments for detecting abnormal bids in capped auctions (auctions with an upper bid limit set by the auctioner) and extend them to the more conventional uncapped auctions (where no such limits are set). To accomplish this, a new method is developed for estimating the values of bid distribution supports by using the solution to what has become known as the German Tank problem. The model is then demonstrated and tested on a sample of real construction bid data, and shown to detect cover bids with high accuracy. This paper contributes to an improved understanding of abnormal bid behavior as an aid to detecting and monitoring potential collusive bid practices. DOI: 10.1061/(ASCE)CO .1943-7862.0000978. This work is made available under the terms of the Creative Commons Attribution 4.0 International license, http:// creativecommons.org/licenses/by/4.0/. Author keywords: Bidding; Abnormal bid; Bid covering; Collusion; German Tank problem; Construction auctions; Contracting. Introduction So-called bid-covering or cover bidding is the most recurrent form of collusive arrangement in sealed bid auctions (Ishii 2008). In the bidding context, collusion (or bid rigging as it is sometimes It occurs when individuals or firms agree to submit bids in which known) occurs when businesses that would otherwise be expected either (1) a competitor agrees to submit a bid that is higher than the to be genuinely competing for work secretly conspire to raise prices bid of the designated winner, (2) a competitor submits a bid that or sometimes to lower the quality of goods or services for pur- is known to be insufficiently competitive to be accepted from the chasers in a bid process (OECD 2009). Collusive bids can be technical standpoint, or (3) a competitor submits a bid that contains particularly damaging in public procurement, since in Organization special contractual terms that are known to be unacceptable to the for Economic Cooperation and Development (OCED) countries, auctioneer (OECD 2007). Cover bids are also used in the well- for example, public procurement represents about 15% of gross known collusive arrangement of bid rotation (Porter and Zona domestic product (GDP; OECD 2007), a value even higher in other 1993; Ishii 2009), which involves participating firms continuing countries (Aoyagi and Fréchette 2009). Collusive practices also to bid while taking turns to be the winning bidder. absorb resources from procurers and taxpayers, since this action Thus, classifying bids as abnormal and combating collusion usually undermines the advantages of a competitive market and are primary concerns for auctioneers as those bidders who manage diminishes public confidence in the competitive process (Marshall to form a viable cartel or bidding ring (i.e., a group of companies and Marx 2009; Anderson and Cau 2011). Moreover, these are il- planning to restrict the amount of actual competition among the legal in many countries, involving considerable resources dedicated participants in one or several auctions) can seriously affect winning to prosecuting those companies involved (Bajari and Summers bid values (Blume and Heidhues 2008; Hu et al. 2011). As a result, 2002; Hendricks et al. 2008). Klemperer (2002) and Anderson et al. (2012) regard that collusion, as well as other competition policy issues, is being more important 1Assistant Professor, Departamento de Ingeniería y Gesti´on de la in the design of practical auctions than the budget-constraint, affili- Construcci´on, Faculty of Engineering, Universidad de Talca, Camino los ation, and risk-aversion issues that are often addressed in the main- Niches, km 1, Curic´o, Chile (corresponding author). E-mail: pballesteros@ stream theory of auctions. Downloaded from ascelibrary.org by 190.110.102.1 on 02/24/15. Copyright ASCE. For personal use only; all rights reserved. utalca.cl The literature proposes some forms of auction rules to discour- 2Professor, School of Civil Engineering and the Built Environment, age collusion, such as establishing a reserve price that is a function Queensland Univ. of Technology, Gardens Point, Brisbane, Australia. E-mail: [email protected] of cartel size (Graham and Marshall 1987), selecting efficient auc- 3Senior Lecturer, Dept. of Mechanical Engineering, Univ. of Auckland, tion mechanisms depending on the amount of correlation between 20 Symonds St., Auckland 1010, New Zealand. E-mail: r.das@auckland colluders (Laffont and Martimort 2000), exploiting informational .ac.nz asymmetries concerning potential colluders and including a nontri- 4Assistant Professor, Centro de Sistemas de Ingeniería, KIPUS, Faculty vial probability of not selling the object auctioned (Che and Kim of Engineering, Universidad de Talca, Camino los Niches, km 1., Curic´o, 2006, 2008), and including both effective ceiling and reserve prices Chile. E-mail: [email protected], [email protected] (Chowdhury 2008). However, collusion schemes are always diffi- Note. This manuscript was submitted on July 8, 2014; approved on January 5, 2015; published online on February 23, 2015. Discussion period cult to detect as they are typically negotiated in a strictly secretive open until July 23, 2015; separate discussions must be submitted for indi- way and are not usually evident from the results of a single auction, vidual papers. This paper is part of the Journal of Construction Engineer- as cover bids have to give the appearance of genuinely competitive ing and Management, © ASCE, ISSN 0733-9364/04015010(11)/$25.00. bids (Bajari and Summers 2002). An additional problem is that an © ASCE 04015010-1 J. Constr. Eng. Manage. J. Constr. Eng. Manage. effective strategy for avoiding collusion usually requires the auc- attention has been paid in the literature relating to the inner working tioneer to be able to predict the distribution function from which of the bidding rings or collusive bid groups (McAfee and McMillan bidders are assumed to draw their values and be aware of which 1992; Hendricks et al. 2008). Related work includes the Porter bidders belong to which cartel (Bajari and Summers 2002), while and Zona (1993, 1999) modeling of the probability of a bidder win- obtaining such information is intricate, if not impossible, in practice ning by assuming a bid function linear in observable cost factors. (Hu et al. 2011). Subsequent work (P. Bajari and L. Ye, “Competition versus collu- A collusive arrangement is often revealed only upon the appear- sion in procurement auctions: Identification and testing,” Working ance of a steady pattern of distrustful or abnormal behavior from Paper, Stanford University, Stanford, California, 2003) consistently several bidders over a period of time (OECD 2009). However, the observes the violation of the so-called conditional independence existence of such patterns does not necessarily act as evidence and exchangeability conditions, which must always be satisfied of collusion, as there may simply be decreasing returns to scale by a competitive bid strategy. of bidders’ cost functions or a change in market conditions. For Finally, Ballesteros–Pérez et al (2012a, 2013a, 2014) introduce example, lower marginal costs occur with firms with idle capacity a bid tender forecasting model that is partially reconfigured to (low current workload) and hence, when reflected in the bid, are detect extreme abnormal bidders in capped auctions (Ballesteros– relatively more likely to win the auction (Porter and Zona 1993; Pérez et al. 2013b). This method, which the writers term the Porter 2005). Despite this cautionary note, sets of tools that help Ballesteros–González–Canavate˜ method, is aimed at identifying identify particular bid behaviors as being collusive, or at least ab- bidders whose behavior is not conditionally independent and ex- normal, can be of use to auctioneers (Rasch and Wambach 2009). changeable, that is, not in accordance with a regular or predictable In this paper, we aim at identifying abnormal bids in either pub- pattern.
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