Bidding Rings

A bidding ring is a collection of bidders who collude in an auction in order to gain greater surplus by depressing competition. This entry describes some typical bidding rings and provides an introduction to the related theoretical and empirical literature. When bidders in an auction collude in order to diminish competition between themselves, and hence earn greater surplus, the resulting cartel is often referred to as a bidding ring. The act of colluding in an auction is often referred to as 'bid rigging'. Bidding rings are illegal in most jurisdictions. In the USA, for example, a bidding ring is a violation of the Sherman Act and is punished by fines for both individuals and firms, and by jail time for those individuals involved. Canonical examples of bidding rings include the 'Electrical Conspiracy' in the 1950s, in which 29 suppliers of industrial electrical generators and equipment colluded in first price sealed bid procurement auctions (Smith, 1961; McAfee and McMillian, 1992). This ring used a bid rotation scheme in which each ring member was allocated a phase of the Moon. The phase of the Moon at the time of the auction determined which of the ring members had the right to bid, free from competition from other members of the ring. Another example, this time in an ascending price auction, and involving an explicit sidepayment system, was the ring adopted by 81 book dealers in the auction of the library of Ruxley Lodge in 1919 (Freeman and Freeman, 1990) and Porter (1992)). After buying up the contents of the library free from internal competition, the ring members met in a sequence of knockout auctions which reallocated the contents of the library to those ring members who valued them the most. (A knockout auction is an auction conducted among ring members.) Participation in the knockouts became more restricted as the sequence progressed. The proceeds of each knockout were shared equally among participants, thus generating a system of sidepayments that increased with the participation (and presumably importance) of each ring member (Graham et al. (1990) describe similar cartels). Importantly, many examples exist of bidding rings with many members, providing counterexamples to the common presumption that collusion is prohibitively difficult in markets with large numbers of participants. The theoretical literature on bidding rings tends to focus on how the ring can allocate bids and transfers to its members in a way that is incentive compatible …