COLLUSION IN PROCUREMENT AUCTIONS: AN EXPERIMENTAL EXAMINATION

Bart J. Wilson (*) I. INTRODUCTION Questioning the value of efforts to enforce federal anticonspiracy laws raises spirited debate among antitrust economists. Although everyone recognizes the welfare costs of successful conspiracies, commentators such as Armentano (1990) and Cohen and Scheffman (1989) argue that conspiratorial arrangements are pervasively ineffective, and thus, that social resources spent prosecuting cob lusion are wasted. Others, including Marvel et al. (1988) express more ambivalence about the seriousness of conspiracies as a social problem but believe that the government manages to detect only the most ineffective arrangements. Still other economists clearly believe in the effectiveness of current government efforts (see, e.g., Werden [1989] and Froeb et al. [1993]). Ultimately, the pervasiveness of conspiratorial behavior and the magnitude of the consequent damages are empirical issues. However, the illegality of collusion complicates the collection of relevant data. Tip-offs or complaints frequently expose conspiracies, but good reasons exist for suspecting that conspiracies detected in this fashion tend to be the least profitable. A conspirator likely "rats" on co-conspirators only if he or she is disenchanted with the scheme, suggesting that the conspiracy is about to collapse anyway. Similarly suspect are conspiracies that are sufficiently clumsy to raise the protests of buyers. The detection problem would be vastly simplified if conspiracies could be identified in the absence of a "smoking gun." Posner (1969) argues that such explicit evidence of conspiratorial behavior is unnecessary because conspiring firms exhibit identifiable patterns of activity that are alone sufficient to determine illegality. Kuhlman (1969) and Gallo (1977) go still further and advocate the continuous computerized monitoring of pricing and sales data to detect conspiracies. However, as Marshall and Muerer (1998) observe, a potentially condemning defect of any attempt to detect collusion via behavior is that, depending on underlying conditions, virtually any "suspect" pattern of behavior can be generated as a noncollusive Nash equilibrium. Identical prices, for example, are often cited as an indication of coordinated activity (e.g., Mund [1960]). (1) But in games, such as the one modeled by Anton and Yao (1992), agents submit identical bids in a Nash equilibrium in the absence of collusion. Furthermore, some evidence from collusion cases prosecuted by the Department of Justice suggests that identical prices are rarely part of collusive arrangements, except when the industry is not very concentrated (Comanor and Schankerman, 1976). Market rotations, a second pricing scheme that is typically cited as a suspect pattern, may also be consistent with a subgame perfect noncooperative Nash equilibrium. Zona (1986) for example, identifies a number of approximate equilibria involving contract rotations when sellers have steeply increasing cost structures. Also, Lang and Rosenthal (1991) characterize a noncooperative static equilibrium for a multiproduct contracting environment, where sellers both divide the market and submit noncompetitively high bids in the market where they do not expect to win. (2) Still other pricing patterns are possibly suspect. Porter and Zona (1993) report evidence of bid rigging in procurement auctions from the pattern of losing bids. The intuition is that in a competitive environment, bids should be correlated with costs. When prices are fixed, however, this correlation breaks down? This article reports a laboratory experiment designed to explore the relationship between suspect behavior and collusion. We focus on coordinated behavior in procurement auctions, a context where collusion is often suspected and has been frequently observed. (4) Two environments are examined: a set cost regime that contains some features critical to standard government procurement auctions for goods, and an endogenous cost regime, which exhibits some critical elements of procurement bidding for construction contracts. …