Simulating Competitive Bidding in Construction Collusive Bidding Cases

Abstract

Collusive bidding is regarded as one of the most socially harmful, anticompetitive, and illegal practices in the construction sector. Bid-rigging, which is a form of collusion, refers to the process in which several bidders illegally form a consortium to fix the winner of the bid. Bid-rigging, also referred to as collusive tendering, occurs when two or more competitors agree they will not compete genuinely with each other for tenders, allowing one of the cartel members to win the tender. Bid-rigging results in economic harm to the owner that is seeking the bids, and to the public. An analysis of economic harm due to bid-rigging is intended to demonstrate that the realized price in bid-rigging is an overestimate of the price that bids would have fetched in the absence of collusion. However, in civil antitrust litigation concerning bid-rigging, proof of injury-in-fact and damages have often been the most troublesome elements. Thus, simulating competitive bidding is essential in bid-rigging damages estimation, because the amount of overcharge suffered requires an estimate of what the winning bids would have been if true competitive bidding had occurred. However, simulation models for forecasting the damages due to bid-rigging, especially in design-bid-build (DBB) contracts in the construction management literature, are very scarce. In this paper, a statistical simulation model is proposed for predicting the damage due to bid-rigging in DBB contracts, based on decision-making theory. This empirical study suggests that, for projects with rigged bids, the model simulates competitive bids that are close to the actual competitive bidding environment. The model is validated with an actual bid-rigging case collected from the Korean construction industry. The empirical evidence collected in this study on the possible damages due to bid-rigging provides valuable insight into the challenges faced by the construction industry. The study's result expands upon competitive bidding theory by developing a process to simulate what the optimal bidding strategy would be in the absence of collusion, to predict the damage due to bid-rigging in DBB construction contracts.