Collusion in Auctions with Constrained Bids: Theory and Evidence from Public Procurement

Abstract

We study the mechanics of cartel enforcement and its interaction with bidding constraints in the context of repeated procurement auctions. Under collusion, bidding constraints weaken cartels by limiting the scope for punishment. This yields a test of collusive behavior exploiting the counter-intuitive prediction that introducing minimum prices can lower the winning bid distribution. The model's predictions are borne out in Japanese procurement data, where we find evidence that minimum prices weakened collusion. A robust design insight is that setting a minimum price at the bottom of the observed winning bid distribution necessarily improves over a minimum price of zero.

On the determinants and consequences of informal contracting

“…Chassang and Ortner () investigate cartel agreements among contractors in procurement auctions in Japan. Their paper argues that price wars are a channel through which cartels punish members’ deviations.…”

“…Chassang and Ortner () test their theoretical prediction using a difference‐in‐difference methodology where the treatments are minimum procurement option bidding policies introduced in six Japanese cities. They find that consistent with H2, the distribution of bids in the city of Tsuchiura prior to the policy change first‐order stochastically dominates the distribution of bids after the change.…”

“…On the other hand, the instrument used in the 2SLS approach uses variation in the number of taxi owners from the driver's social network within distance of the driver's address, but where drivers choose to live is endogenous and may be correlated with other factors that influence (see list above) the decision of driving a taxi within her social network. Chassang and Ortner (2017) investigate cartel agreements among contractors in procurement auctions in Japan. Their paper argues that price wars are a channel through which cartels punish members' deviations.…”

“…Interpreted through the lenses of our illustrative model, a legally imposed minimum pricing policy is equivalent to a permanent increase in the fallback option of cartel members following a deviation (that is, an increase in ), which according to hypothesis H2 should lead to a decrease in cartel performance-that is, a decrease in prices. Chassang and Ortner (2017) test their theoretical prediction using a difference-in-difference methodology where the treatments are minimum procurement option bidding policies introduced in six Japanese cities. They find that consistent with H2, the distribution of bids in the city of Tsuchiura prior to the policy change first-order stochastically dominates the distribution of bids after the change.…”

“…The empirical works we discuss span a variety of industries and contractual settings, including CEO compensation (Gillan, Hartzell, & Parrino, 2009), movie exhibition (Barron, Gibbons, Gil, & Murphy, 2017;Gil, 2013), procurement (Chassang & Ortner, 2017;Corts & Singh, 2004;Gil & Marion, 2013;Johnson, McMillan, & Woodruff, 2002), supply chains (Macchiavello & Miquel-Florensa, 2017), international trade (Macchiavello & Morjaria, 2015), transportation (Jackson & Schneider, 2011;Gil, Kim, & Zanarone, 2017), and politics (Shelef, 2013).…”