This is an illegal practice where competitors collude to manipulate the bidding process to win contracts or tenders. It involves agreements or arrangements between bidders before the bidding process to allocate contracts among themselves.
Bid rigging manipulates the market and could result in a bid price that is higher than what it should be in a competitive free market.
Bid rigging can take different forms. A very common one which we have already mentioned is competitors colluding together to agree on the winner of a bid prior to the bidding.
These other forms are; taking turns to submit lower bids, staying away from the bidding process entirely, intentionally submitting ridiculously high bids, hiring a subcontractor or entering into a joint venture all for the sake of manipulating the bidding process.
Factors that makes bid rigging possible
There are certain market conditions that makes bid rigging possible. One such condition is when contracts are awarded through a competitive bidding process.
Another factor that could lead to collusion among competitors in a bidding process is when there are just a handful of companies participating in the bid.
The fewer the companies, the easier it is for them to collude and rig the bidding process. This is common in industries with a high entry margin. Because of this, very few businesses can penetrate the market thus increasing the chances of collusion among in the industry.
Bid rigging should not be confused with price fixing. Although both are illegal and both can occur in a market where few companies call the short, they are still very different.
Bid rigging only occurs when contracts are awarded via a bidding process. That is to say they must be a bidding process. On the other hand, price fixing is when companies collude together to raise the price of a product or fix the price.