In the market, there are many ways to buy and sell products or services.
For example, if you want to purchase some coconut milk—my favorite kind of milk—you can walk into a grocery store, go to the milk section, examine the prices of the different brands, and if one of them is acceptable to you, carry that milk to the register and pay the listed price.
Similarly, if you want to purchase a Fitbit Blaze, you find the Fitbit manufacturer’s product in a store or online and pay the listed price. Oftentimes products like this, from a specific manufacturer, are the same price wherever you look because of resale price maintenance or a Colgate policy (to be clear, I am not aware of whether Fitbit has any such program or policy). But these vertical price arrangements are not the subject of this article.
Another approach—and the true subject of this article—is to accept bids to purchase a product or service. Governments often send out what are called Requests for Proposals (RFPs) to fulfill the joint goals of obtaining the best combination of price and service/product and to minimize favoritism (which doesn’t always work).
But private companies and individuals might also request bids. Have you ever renovated your house and sought multiple bids from contractors? If so, that is what we are talking about. If you’ve done this as a real-estate investor, you should read our real-estate blog too.
What is Bid-Rigging?
Let’s say you are a bidder and you know that two other companies are also bidding to supply tablets and related services to a business that provides its employees with tablets. The bids are blind, which means you don’t know what the other companies will bid.
You will likely calculate your own costs, add some profit margin, try to guess what the other companies will bid, then bid the best combination of price, product, and services that you can so the buyer picks your company.
This approach puts the buyer in a good position because each of the bidders doesn’t know what the others will bid, so each potential seller is motivated to put together the best offer they can. The buyer can then pick which one it likes best.
But instead of bidding blind, what if you met ahead of time with the other two bidding companies and talked about what you were going to bid? You could, in fact, decide among the three of you which one of you will win this bid, agreeing to allow the others to win bids with other companies. In doing this, you will save a lot of money.
The reason is that you don’t have to put forth your best offer—you just have to bid something that the buyer will take if it is the best of the three bids. You can arrange among the three bidders for the other two bidders to either not bid (which may arouse suspicion) or you could arrange for them to bid a much worse package, so your package looks the best. The three bidders can then rotate this arrangement for other requests for proposals. Or you offer each other subcontracts from the “winner.”
If you did this, you’d save a lot of money, in the short run.
Of course, in the medium and long run, you might be in jail and find yourself on the wrong side of civil antitrust litigation.
Bid rigging is also a criminal antitrust violation that can lead to jail time. For example, the Department of Justice, Antitrust Division, recently obtained an indictment of a California real-estate investor that rigged bids for foreclosed properties. This is part of a broader DOJ investigation into bid rigging among real-estate investors.
Bid-rigging conduct also leads to civil antitrust litigation. Many years ago, when I was still with DLA Piper, I spent a lot of time on a case that included bid-rigging allegations in the insurance and insurance brokerage industries called In re Insurance Brokerage Antitrust Litigation.