Civil Engineering Reference
In-Depth Information
1
There are very few firms. They know each other well enough to understand that
one of them cannot gain sales without inducing retaliation. So some agreement
to co-ordinate their policies may be reached.
2
The firms produce similar products. As a result, it is difficult to gain a specific
advantage in the market. In such a situation, firms may prefer some form of
joint effort in preference to the cut-throat behaviour necessary to take customers
away from each other.
3
There is a dominant firm. Other firms may look to the dominant one for its
judgement about market conditions and take its lead on prices. In short, the
dominant firm becomes a reference point and the focus for tacit agreement.
4
The firms have very similar average costs. In this case it is unlikely that firms
will enter into price competition. Rivalry could break out in other forms, unless
some joint agreement is reached to maximise profits.
5
New entrants face significant barriers to entry. The theory of perfect competition
suggests that high profits in an existing market will attract new entrants and, as
a result, prices and profits reduce. This profit-damaging activity is less likely to
occur if some agreement between the existing firms has been made to prevent
other firms breaking into the market.
COLLUSION - RIGGED PRICES
It is difficult to gauge the extent of qualified joint profit-maximising agreements,
as in most countries they are illegal. There are, however, countless opportunities
that one can envisage and the examples that are talked about are no doubt only
a tip of the iceberg. Certainly there is widespread evidence of collusion across the
construction sector in Australia, Canada, Germany, Netherlands, South Africa,
South Korea, Philippines, USA and the United Kingdom (Brockmann, 2011: 31-2).
For example, in the UK, the investigation carried out by the OFT during 2008 into
anti-competitive agreements resulted in 112 construction companies being fined and
prosecuted for a total of 240 incidents of
cover pricing
.
Cover pricing describes an age-old practice where one contractor asks another
contractor on the same tender list to quote a price which will be above that quoted
by the first contractor. In other words, it involves one or more bidders colluding
with a competitor during the tender process to put in prices which are intended to
be too high to win the contract. As a result, the client is left with a false impression
of the level of competition and this could easily result in the client paying inflated
prices for the work. In short, those involved in a bid rigging cartel work together
to decide who will win a contract and at what price. In extreme cases firms may
even 'pay off' those who agree not to tender a bid, although the more common
arrangement seems to be where the firm providing the 'cover price' does so in
exchange for a similar favour when future contracts arrive in the market. In these
cases, the group of contractors are virtually, by concerted action, forming themselves
into the structure of an oligopoly so that they can raise the level of profits and share
them around on a rota basis. As an example of this process consider the data shown
in
Table 8.1
which represents four bids submitted to Newcastle City Council (the
client) for the complete refurbishment of 194 council houses. As you can see each
