Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
Factors that facilitate collusion
Economists have found that the following market features help firms to reach
and sustain a collusive agreement. 189 These are:
● High concentration: the lower the number of potential firms in a market, the
easier it is to reach an agreement between them;
● Symmetry of firms: it is easier for firms to reach an agreement when they are
similar as their interests are more likely to be aligned;
● Transparency: a transparent market makes it easier for firms to reach an
agreement and to monitor that the agreement is being maintained;
● Homogenous contracts: if contracts are similar, it is easier for firms to share
them amongst themselves;
● Regularity and frequency of orders: if there are frequent, regular orders it is
easier for firms to sustain a collusive agreement. It may not be worth
deviating and undermining the agreement for a small contract. Moreover,
punishing cheating firms is easier when the next contract comes soon;
● Multi-market contacts: these can help collusion by increasing the symmetry
of firms (as one may be strong in one market, and one strong in another) and
by increasing the regularity of orders. Where firms have a ‘natural territory’
this can also make it easier to agree on an initial allocation of contracts;
● Stable demand: stable demand makes it easier for firms to determine
whether prices have fallen due to a firm cheating on an agreement or a
genuine fall in demand;
● High barriers to entry: this makes it less likely that collusion will be
undermined by new entrants; and
● Absence of buyer power: a strong buyer can make collusion more difficult
through the design of the sales process.
Factors that make public procurement vulnerable to collusion
A number of the factors listed above are often found in public procurement
processes, increasing the potential for collusion. Although governments should
often be in a position to exercise buyer power, the design of some procurement
processes has on occasions created conditions ideal for fostering collusion
among bidders. For example, standard contracts are often awarded by many
local authorities on a local basis, resulting in a high degree of regular, standard
contracts and repeated interaction among firms. In addition, many public tender
processes can require a past track record by a firm, creating barriers to entry and
reducing the pool of potential firms. Risk-averse government agencies, such as
those involved in the provision of frontline services, are likely to favour
procurement through a steady and predictable flow of demand. Stable demand
189 Motta (2004), Competition Policy: Theory and Practice, Cambridge University Press.
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