Responsible researcher: Eduarda Miller Figueiredo
Original Title: Collusion in Auctions with Constrained Bids: Theory and Evidence from Public Procurement
Authors: Sylvain Chassang and Juan Ortneer
Intervention Location: Ibaraki Prefecture (Japan)
Sample Size: 10.553
Sector: Public Sector
Variable of Main Interest: Auction bids
Type of Intervention: Policy change in the distribution of winning bids in auctions
Methodology: Game Theory and Diff-in-Diff
Summary
In this study, the impact of minimum price restrictions on the formation of collusion in the Japanese construction industry is investigated. The researchers analyzed data from public works projects auctioned between 2007 and 20116, carried out in Ibaraki Prefecture (Japan). The results indicate that keeping contracts less complete than necessary plays a significant role in practice and can be used to reduce the occurrence of collusion between companies. It is concluded that the implementation of a minimum price in proposals is always more effective than the absence of such a measure.
By studying the mechanics of cartel enforcement and its interaction with constraints in the context of repeated auctions, this article has shown that in the presence of colluding bidders, attempts to extract surpluses can foster collusion and reduce the auctioneer's surplus. Conversely, providing minimum surplus guarantees can limit collusion and improve the auctioneer's surplus.
Cartel literature considers scenarios in which cartel members can commit to mechanisms and, as a result, argues that proper auction design can successfully limit collusion, as long as participants have financial resources and can make ex- -ante (Pavlov, 2008; Che and Kim, 2009). When studying full implementation in repeated environments using dynamic mechanisms, Lee and Sabourian (2011), as well as Mezzetti and Renou (2012), show that implementation in all equilibria can be achieved by restricting the set of continuation values available to players. to support repeated game strategies.
McAfee and McMillan (1992) show that collusion makes lower maximum prices desirable and, in this reasoning, the authors of this article analyzed here argue that higher minimum prices can help weaken cartels.
Ishii (2008) and Kawai and Nakabayashi (2014) provide evidence of widespread collusion in Japanese procurement auctions. This suggests that purchasing in Japan is an environment where minimum price restrictions could have a plausible effect on the issue of collusion in the Japanese construction industry.
Based on the reasoning outlined above, the authors have three main objectives:
It is recognized that governments need to procure construction services on an ongoing basis, facing a limited and stable set of companies that can potentially perform the work, and a subset of which regularly participate. Legislation often requires participants to register, and governments release bids and results after the conclusion of each auction. The repeated and public nature of the interaction makes collusion a realistic concern.
For the research, the authors used available data from public works projects auctioned between May 2007 and March 2016, corresponding to 10,553, which took place in the 30 most populous cities in Ibaraki Prefecture (Japan). Control cities do not experience political change in the distribution of winning proposals during the period, while treatment cities do.
To carry out the evaluation, the authors used game theory modeling. In this model, in each period ( t ) a buyer purchases a single unit of a good through a first-price auction. In each period, a subset of companies is able to participate in the auction. And at each period ( t ) each participating company can deliver the good at a cost . Companies can send transfers to each other regardless of whether they participate in the auction or not. And it is assumed that all companies belong to the cartel and observe each other's production costs.
The procurement contract is allocated according to the first price auction, with restricted bids; that is, bids outside a price range are discarded. The winner is the bidder with the lowest bid, but who does not deliver the item at the price he offered.
The interaction is repeated, and firms can use the promise of continued collusion to impose obedient bids and transfers. Bidding and transfers need to be part of a subgame perfect equilibrium of the repeated game between firms. Having played the entire game, under complete information, the unique result of competitive equilibrium is such that the winning bid is equal to the maximum between the second lowest cost and the minimum price. The contract is awarded to the lowest cost bidder whenever the winning bid is above the minimum price and is randomly allocated among all cost bidders below the minimum prices when the winning bid is equal to the minimum price.
To measure the impact of a policy change on the distribution of winning proposals at the city level, the authors used the “ change-in-changes ” [1] or difference-in-differences estimation methods.
Under collusion, the introduction of a small minimum price should lead to a drop in the right-tail distribution of winning bids. Under competition, it was not expected to see such a change.
The results of the estimations using quantile regressions show that the policy change is associated with a drop in dominance in the right tail of the winning bids. The implication is not just that collusion exists, but that restrictions on cartel enforcement are binding and that the sustainability of collusion is limited by price restrictions.
By studying who is affected by the political change, the authors realize that absent minimum prices, long-term companies obtain contracts at higher prices. In which the introduction of price floors has a disproportionately greater impact on long-term winners than on new winners.
The difference-in-differences analysis assumes that control cities are not affected by the policy change. A potential concern is that some of the long-term bidders active in a treatment city may also be active in control cities. If this is the case, the introduction of minimum bids in a treatment city may also cause a change in the distribution of bids in the control cities.
The conclusion of this article is that the implementation of a minimum price in observed proposals always overcomes the absence of a minimum price. When there is no collusion, this does not impact the distribution of proposals. However, in the presence of collusion, it may only reduce the dispersion of proposals.
The authors also provide empirical evidence that the mechanism of keeping contracts more incomplete than necessary plays a significant role in practice and can be used significantly to affect collusion between companies.
References
Athey, S. and GW Imbens (2006): “Identification and Inference in Nonlinear Difference-in-Differences Models”, Econometrica , 74, 431-497.
Che, Y.-K. and J. Kim (2009): “ Optimal collusion-proof auctions ", Journal of Economic Theory, 144, 565-603.
Ishii, R. (2008): “Collusion in repeated procurement auction: A study of a paving market in Japan", Tech. rep., ISER Discussion Paper, Institute of Social and Economic Research, Osaka University.
Kawai, K. and J. Nakabayashi (2014): “Detecting Large-Scale Collusion in Procurement Auctions", Available at SSRN 2467175 .
Lee, J. and H. Sabourian (2011): “Efficient Repeated Implementation”, Econometrica , 79, 1967-1994.
McAfee, R.P. and J. McMillan (1992): “Bidding rings,” The American Economic Review , 579-599.
Mezzetti, C. and L. Renou (2012): “Repeated Nash Implementation”, Available at SSRN 2096184 .
[1] Athey and Imbens (2006).
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