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A network approach to cartel detection in public auction markets

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  • Johannes Wachs
  • J'anos Kert'esz

Abstract

Competing firms can increase profits by setting prices collectively, imposing significant costs on consumers. Such groups of firms are known as cartels and because this behavior is illegal, their operations are secretive and difficult to detect. Cartels feel a significant internal obstacle: members feel short-run incentives to cheat. Here we present a network-based framework to detect potential cartels in bidding markets based on the idea that the chance a group of firms can overcome this obstacle and sustain cooperation depends on the patterns of its interactions. We create a network of firms based on their co-bidding behavior, detect interacting groups, and measure their cohesion and exclusivity, two group-level features of their collective behavior. Applied to a market for school milk, our method detects a known cartel and calculates that it has high cohesion and exclusivity. In a comprehensive set of nearly 150,000 public contracts awarded by the Republic of Georgia from 2011 to 2016, detected groups with high cohesion and exclusivity are significantly more likely to display traditional markers of cartel behavior. We replicate this relationship between group topology and the emergence of cooperation in a simulation model. Our method presents a scalable, unsupervised method to find groups of firms in bidding markets ideally positioned to form lasting cartels.

Suggested Citation

  • Johannes Wachs & J'anos Kert'esz, 2019. "A network approach to cartel detection in public auction markets," Papers 1906.08667, arXiv.org.
  • Handle: RePEc:arx:papers:1906.08667
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    References listed on IDEAS

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    Cited by:

    1. Bovin, Andreas & Bos, Iwan, 2023. "Market Shares as Collusive Marker: Evidence from the European Truck Industry," Research Memorandum 011, Maastricht University, Graduate School of Business and Economics (GSBE).
    2. Kei Kawai & Jun Nakabayashi & Juan Ortner & Sylvain Chassang, 2023. "Using Bid Rotation and Incumbency to Detect Collusion: A Regression Discontinuity Approach," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(1), pages 376-403.
    3. Kurdoglu, Berkay & Yucel, Eray, 2022. "A Cointegration-based cartel screen for detecting collusion," MPRA Paper 113888, University Library of Munich, Germany.
    4. Granlund, David & Rudholm, Niklas, 2023. "Calculating the probability of collusion based on observed price patterns," Umeå Economic Studies 1014, Umeå University, Department of Economics, revised 13 Oct 2023.
    5. Gabrielli, M. Florencia & Willington, Manuel, 2023. "Estimating damages from bidding rings in first-price auctions," Economic Modelling, Elsevier, vol. 126(C).
    6. Lucas Potin & Rosa Figueiredo & Vincent Labatut & Christine Largeron, 2023. "Pattern Mining for Anomaly Detection in Graphs: Application to Fraud in Public Procurement," Post-Print hal-04131485, HAL.
    7. J'anos Kert'esz & Johannes Wachs, 2020. "Complexity science approach to economic crime," Papers 2008.12364, arXiv.org.
    8. Mihály Fazekas & Johannes Wachs, 2020. "Corruption and the Network Structure of Public Contracting Markets across Government Change," Politics and Governance, Cogitatio Press, vol. 8(2), pages 153-166.
    9. Ribeiro, Haroldo V. & Lopes, Diego D. & Pessa, Arthur A.B. & Martins, Alvaro F. & da Cunha, Bruno R. & Gonçalves, Sebastián & Lenzi, Ervin K. & Hanley, Quentin S. & Perc, Matjaž, 2023. "Deep learning criminal networks," Chaos, Solitons & Fractals, Elsevier, vol. 172(C).
    10. Brown, David P. & Eckert, Andrew & Silveira, Douglas, 2023. "Screening for Collusion in Wholesale Electricity Markets: A Review of the Literature," Working Papers 2023-7, University of Alberta, Department of Economics.

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