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Detecting Collusion in Procurement Auctions: A Selective Survey of Recent Research

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  • Patrick Bajari
  • Garrett Summers
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    Abstract

    Revised April 2002 Economic theory suggests that if firms can successfully collude, they will be able to increase their own profits at the consumers’ expense. Government antitrust policy aims to protect the public from such behavior. Enforcing such policy depends on a prosecutor’s ability to detect collusive behavior among firms. In this paper, we discuss an approach developed Bajari and Ye (2001a,b) for detecting collusion. First, we discuss two conditions: conditional independence and exchangeability, which the data must exhibit if it has been generated by non-collusive behavior. Second, by eliciting information from industry experts about costs across the industry under scrutiny, it is possible to compute the probability that the data was generated by competition or collusion. These tests appear to work well in empirical applications. In industries where competition is widely believed to exist, we find that our conditions are largely supported by the data. In industries where collusion has already been proven, we find that indeed, our tests point to obvious collusion. While we do not believe these empirical tests are flawless, we argue that they can be a useful first step in detecting suspicious bidding behavior. Working Papers Index

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    Paper provided by Stanford University, Department of Economics in its series Working Papers with number 01014.

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    Handle: RePEc:wop:stanec:01014

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    1. Marshall, R.C. & Richard J.F., 1995. "Bider Collusion at Forest Service Timber Sales," Papers 7-95-3, Pennsylvania State - Department of Economics.
    2. Patrick Bajari & Lixin Ye, 2003. "Deciding Between Competition and Collusion," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 971-989, November.
    3. Fehl, Ulrich & Guth, Werner, 1987. "Internal and external stability of bidder cartels in auctions and public tenders: A comparison of pricing rules," International Journal of Industrial Organization, Elsevier, vol. 5(3), pages 303-313.
    4. Kenneth HENDRICKS & Robert H. PORTER, 1989. "Collusion in Auctions," Annales d'Economie et de Statistique, ENSAE, issue 15-16, pages 217-230.
    5. Robert H. Porter & J. Douglas Zona, 1992. "Detection of Bid Rigging in Procurement Auctions," NBER Working Papers 4013, National Bureau of Economic Research, Inc.
    6. William S. Comanor & Mark A. Schankerman, 1976. "Identical Bids and Cartel Behavior," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 281-286, Spring.
    7. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, vol. 82(3), pages 579-99, June.
      • McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
    8. Thomas VON UNGERN-STERNBERG, 1988. "Cartel Stability in Sealed Bid Second Price Auctions," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 8802, Université de Lausanne, Faculté des HEC, DEEP.
    9. Robert H. Porter & J. Douglas Zona, 1997. "Ohio School Milk Markets: An Analysis of Bidding," NBER Working Papers 6037, National Bureau of Economic Research, Inc.
    10. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-83, December.
    11. Geiss, Charles G & Kuhlman, John M, 1978. "Estimating Price Lists, List Changes, and Market Shares from Sealed Bids," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 193-209, April.
    12. Graham, Daniel A & Marshall, Robert C, 1987. "Collusive Bidder Behavior at Single-Object Second-Price and English Auctions," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1217-39, December.
    13. Feinstein, Jonathan S & Block, Michael K & Nold, Frederick C, 1985. "Asymmetric Information and Collusive Behavior in Auction Markets," American Economic Review, American Economic Association, vol. 75(3), pages 441-60, June.
    14. Pesendorfer, Martin, 2000. "A Study of Collusion in First-Price Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 381-411, July.
    15. Hay, George A & Kelley, Daniel, 1974. "An Empirical Survey of Price Fixing Conspiracies," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 13-38, April.
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