Detection of collusion in government procurement auctions Sidhartha S. Padhi a,n , Pratap K.J. Mohapatra b a Operations Management Group, Management Development Institute, Gurgaon, Haryana-122 007, India b Department of Industrial Engineering, Indian Institute of Technology Kharagpur, West Bengal, India article info Article history: Received 29 March 2010 Received in revised form 2 March 2011 Accepted 8 March 2011 Available online 8 April 2011 Keywords: Collusion detection Government procurement auctions Bid price-to-reserve price ratios Competitive and collusive bidding Cluster analysis abstract Research on bidder collusion in procurement auctions is reasonably successful in unveiling the mechanisms of collusion among the bidders. But it is relatively weak in forwarding effective practical methods of collusion detection before the winner is declared, because they presuppose the knowledge of collusion in specific auctions. Past studies, however, point out the need for working with bid price- to-reserve price ratios rather than bid prices or winning bid prices, to be free from the problem of heteroscedasticity. They also draw an important inference that the set of collusive data are significantly different from the set of competitive data. On the basis of these basic facts, the current paper outlines a seven-step approach to collusion detection. The approach makes rudimentary statistical analysis of bid price-to-reserve price ratios for all the bidders. The analysis comprises tests of equality of means, medians and variance and tests of skewness, autocorrelation and normality of the ratios. It divides the ratios into two significantly different clusters. The cluster with the higher mean and variance values of the ratios corresponds to collusive bidding with the other cluster corresponding to competitive bidding. The paper proposes the construction of a process control chart to detect occurrence of collusion in an auction immediately after the price bids are opened. The approach is illustrated by applying it to data from procurement auctions for construction projects in a State Department of the Republic of India. & 2011 Elsevier Ltd. All rights reserved. 1. Introduction Government departments procure a large variety and number of goods and services in order to carry out their normal operational responsibilities and to implement various plans and policies. Gov- ernment procurement typically accounts for 10–15% of GDP for economically developed countries (Global Trade Negotiations, 2006), and up to as much as 20% of GDP in countries like India (Srivastava, 2006). Government departments outsource their required works and services through various methods such as open-cry auctions, competitive bidding through Request for Quota- tion (RFQ), and agreement through negotiation (Padhi and Mohapatra, 2010). Of these, competitive bidding through RFQ, also called the sealed-bid auction, is the most frequently used method, where government invites a sealed technical and financial bid from each contractor against each project. In such an auction, bidders compete with one another by quoting low bid price to outbid their rivals and win the projects (Marshall and Marx, 2007). This is also the only method used by government departments in India to select contractors to award construction projects (CPWD Works Manual, 2003; Padhi and Mohapatra, 2010). Corruption, collusion, and tender fixing are the major concerns of auctions (Blume and Heidhues, 2006; Menezes and Monteiro, 2006; Bolotova et al., 2008). Also several studies (for example, Porter and Zona, 1993, 1999; Pesendorfer, 2000; Connor, 2001; Leyton-Brown et al., 2002; Bajari and Summers, 2002; Skrzypacz and Hopenhayn, 2004; Porter, 2005; Harrington and Chen, 2006; Marshall and Marx, 2007; Kagel and Levin, 2008; Ishii, 2009) have confirmed that bidders form cartels in procurement auctions to increase bid price and clinch contracts at the cost of the auctioneers. Thus, in general, procurements in government departments are beset with many weaknesses. Some of the major weaknesses that are acknowledged in the literature are the following:  Lack of transparency in the award of work contracts is common in government departments (Gupta and Jana, 2003; Liao et al., 2003; Mitra and Gupta, 2007).  Excessive state intervention, favouritism towards the local contractors, and discrimination in awarding contracts create problems in the tender awarding process (Carayannis and Popescu, 2005).  Procurement in government is usually associated with corrup- tion, scandal, and abuse of public resources (McAfee and McMillan, 1992; Mougeot and Naegelen, 2005; Liao et al., 2003; Mitra and Gupta, 2007; Sharma, 2007).  Many studies have confirmed that bidders form cartels in procurement auctions to increase bid price and clinch con- tracts at the cost of the auctioneers (for example, Porter and Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/pursup Journal of Purchasing & Supply Management 1478-4092/$ - see front matter & 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.pursup.2011.03.001 n Corresponding author. Tel.: þ91 9818249328. E-mail addresses: drpadhi@gmail.com (S.S. Padhi), pratap_moha@yahoo.co.in (P.K.J. Mohapatra). Journal of Purchasing & Supply Management 17 (2011) 207–221