Review of Industrial Organization 19: 453–467, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
The Effect of Bid Rigging on Prices: A Study of the
Highway Construction Industry
Department of Economics, Florida Atlantic University, 220 SE 2nd Avenue, Fort Lauderdale, FL
Abstract. This paper examines the effect of multimarket contact in a ﬁrst price sealed bid govern-
ment procurement auction market. It investigates whether bid prices in the highway construction
industry are related to conditions that favor the formation of a cartel. Repeated contacts among
ﬁrms are found to have a signiﬁcantly positive effect on the winning low bid which leads to higher
proﬁt. Further, rivalry among few ﬁrms tends to exacerbate the multimarket effect. The results in this
study additionally support the recent theoretical predictions that collusion is better sustainable during
Key words: Antitrust, auction, multimarket contact, oligopoly.
JEL Classiﬁcations: D43, D44, L13, L74.
Determining the degree of market competition is one of the principal themes in
the industrial organization literature. Theoretical models have analyzed strategic
interactions among ﬁrms with the help of game theory. Economists have concluded
that a dynamic price competition or some repeated interaction among the ﬁrms
facilitates noncompetitive behavior. Collusion in a repeated Bertrand game is sus-
tainable when the long term loss due to an onset of price war is higher than the
immediate short term gain from undercutting. This paper primarily investigates
this issue by examining a government procurement auction market.
As Froeb (1994) points out, though the government sector is about half the size
of the private sector, two thirds of all bid rigging and price ﬁxing cases involve the
government sector, and with only the Congress to supervise their work, the govern-
ment agencies become easy victims of bid riggers. Froeb et al. (1993) further noted,
“over the past ﬁve years, 70 percent of the criminal cases involved bid-rigging
Many thanks to Lawrence Kenney, David Sappington, Sanford Berg and Richard Romano for
their insightful comments on an earlier draft of this paper. I thank Tom Rothrock for providing the
data. I am especially indebted to two anonymous referees for extremely helpful suggestions. All
errors are mine.