Cartels, Competition and Public Procurement
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Cartels, Competition and Public Procurement

Law and Economics Approaches to Bid Rigging

Stefan E. Weishaar

Stefan Weishaar explores the ways in which economic theory can be used to mitigate the adverse effects of bid rigging cartels. The study sheds light on one of the vital issues for achieving cost-effective public procurement – which is itself a critical question in the context of the global financial crisis. The book comprehensively examines whether different laws deal effectively with bid rigging and the ways in which economic theory can be used to mitigate the adverse effects of such cartels. The employed industrial economics and auction theory highlights shortcomings of the law in all three jurisdictions – the European Union, China and Japan – and seeks to raise the awareness of policymakers as to when extra precautionary measures against bid rigging conspiracies should be taken.
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Chapter 4: Auction theory and collusion

Law and Economics Approaches to Bid Rigging

Stefan E. Weishaar


In recent years auctions have become enormously popular and are being used in a large number of economic exchanges in both the public and private sector. They have been used in the selling of mobile phone licences, in the decentralization of electricity markets and will become the default means of allocation in the world’s largest greenhouse gas emissions trading system, the European Emissions Trading System. There are four reasons that make this allocation mechanism attractive. First, an auction is designed to lead to self-revelation of the bidder’s private values. In the presence of inherent information asymmetry in which a potential seller is unable to determine the market value of a particular object, an auction mechanism can yield higher revenues than simply quoting a price or conducting repeated negotiations with potential buyers. While this is very desirable from a theoretical point of view, it should be noted that bidders are generally reluctant to reveal their preferences because they fear that competitors could take advantage of them – thus, protection of this information is crucial for firms. Second, auctions can be designed to ensure allocative efficiency. It should be noted that efficiency here is to be understood as awarding the bidder with the highest valuation for an object with the tender.

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