A cartel is formed when businesses agree to act together for an anti-competitive purpose instead of competing against each other. The cartel forming companies divide the markets and customers between themselves and agree on prices. The consequences are increased prices and deteriorating quality of products and services. Several economic studies and legal decisions of antitrust authorities have found that the median price increase achieved by cartels in the last 200 years is around 25%. Chief Procurement Officers (CPOs) are daunted with the demanding task of identifying and breaking these cartels.
Competition laws often forbid private cartels. Identifying and breaking up cartels is an important part of the competition policy in most countries. As Chief procurement officers (CPOs), you are daunted with the demanding task of identifying and breaking these cartels, especially in a reverse auction process.
However, it is important for you to take into account the "Cost of fighting the Cartel" as in some cases, the decision to break the cartel can backfire.
• The cartel may decide to increase the pricing cohesively
• The cartel may decide to boycott the auction partially or completely, either by not quoting for some of the items or all of the items in the auction
Breaking the cartel in Reverse Auction process
1. Identifying the cartel
The foremost step in breaking the cartel is to identify the cartel. If the supplier is offering inconsistent prices, suspiciously high prices or there is a huge difference in price of winning bid and other bids, surprisingly similar prices between bids, fewer bids for a particular market or suspicious subcontracting agreements, then it should trigger an alarm for you.
2. Building a supplier pool
Cost of fighting cartels is more than the cost of acquiring new suppliers.You should keep on updating and refreshing supplier database by incessantly doing new supplier research. In case when the suppliers are not available for a particular category X, you can pursue on finding suppliers for another Category Y that would serve the same purpose. Cues on new suppliers for category Y can be taken from the suppliers of category X.
3. Onboarding new suppliers
You should foster new supplier development by inviting them in the Request for Proposals (RFPs) and bidding process. There should be a mandate for the procurement team to give importance to new suppliers. CPOs should interact with them and make them feel wanted. It is fitting to resolve their queries and concerns, to train them on the company's sourcing software, promote site visits for them. This will ascertain a stronger buyer-supplier bond with them. New suppliers should feel that they also have a chance of winning the bid.
4. Ensuring Supplier Anonymity
Using an electronic platform for performing reverse auctions can ensure supplier anonymity. During an electronic auction (e-auction), bidding suppliers can view the changing bids and their ranks; however, they do not know the names of their competitors. Non-interaction between the suppliers during and after e-auction can aid in preventing cartel formation. Thus the dynamic competition inherent in reverse auctions can result in equilibrium pricing and delivering hard dollar savings for you.
5. Splitting contracts
Bringing down the size of business provided to the incumbent supplier by involving a new supplier. Say, if supplier X had the contract earlier, but it is found that they are a part of the cartel, then it is advisable to split up the new contract between the new supplier and supplier X. You may not get immediate savings in this process but you may still be able to break the cartel. It is probable though that the incumbent supplier may come to you with a better price offering on realizing that they are losing important business.
6. Non-collusion agreements
Suppliers should be made to sign a non – collusion agreement as part of the bid documents. Fear of getting disqualified from the bidding process may deter the suppliers from collaborating with each other and thus you may be able to break the cartel. You can also consider creating private incentives for the cartel members to play one member against the other. And ultimately, if the supplier power has increased substantially and the chances of breaking a cartel are bleak, you can start looking for alternate products.