A cartel is formed when companies agree to act together for an anti-competitive purpose instead of competing with each other. The companies that make up the cartel share the markets and customers among themselves and agree on prices. The consequences are the increase in prices and the deterioration of the quality of products and services. Various economic studies and legal decisions by antitrust authorities have found that the average price increase achieved by cartels over the last 200 years is around 25%. Chief Procurement Officers (CPOs) are overwhelmed with the demanding task of identifying and taking down these cartels.

Competition laws often prohibit private cartels. Identifying and dismantling cartels is an important part of competition policy in most countries. As Chief Procurement Officers (CPOs), the demanding task of identifying and taking down these cartels is daunting, especially in a reverse auction process.

However, it is important that you keep in mind the “Cost of Fighting the Cartel”, as in some cases, the decision to break up the cartel can backfire.

• The cartel may decide to increase prices in a cohesive way

• The cartel may decide to boycott the auction in whole or in part, either by not listing some or all of the auction items.

Breaking the cartel in the Reverse Auction process

1. Identification of the cartel

The most important step in breaking the cartel is to identify the cartel. If the vendor is offering inconsistent prices, suspiciously high prices or there is a big difference in price between the winning bid and other bids, surprisingly similar prices between bids, fewer bids for a particular market, or suspicious outsourcing deals, then you should set off an alarm. for you.

2. Create a supplier group

The cost of fighting cartels is greater than the cost of acquiring new suppliers. You must keep updating and refreshing the vendor database by constantly researching new vendors. In case providers are not available for a particular category X, you can search for providers for another category Y that has the same purpose. Hints about new providers for category Y can be taken from providers in category X.

3. Incorporation of new suppliers

You should encourage the development of new suppliers by inviting them to the Request for Proposals (RFP) and bidding process. There should be a mandate for the procurement team to give weight to new vendors. CPOs must interact with them and make them feel loved. It’s appropriate to address their queries and concerns, train them on the company’s sourcing software, encourage site visits for them. This will determine a stronger buyer-supplier bond with them. New suppliers must feel that they too have a chance of winning the bid.

4. Guarantee the anonymity of the provider

The use of an electronic platform to carry out reverse auctions can guarantee the anonymity of suppliers. During an electronic auction (electronic auction), bid providers can see the changing bids and their ranges; however, they do not know the names of their competitors. The non-interaction between suppliers during and after the electronic auction can help prevent the formation of cartels. Therefore, the dynamic competition inherent in reverse auctions can result in a break-even price and provide you with dollar savings.

5. Fractionation contracts

Reduce the size of the business provided to the current provider by engaging a new provider. Say, if supplier X had the contract before, but is found to be part of the cartel, then it is advisable to split the new contract between the new supplier and supplier X. You may not realize immediate savings in this process. but may still be able to break through the cartel. However, the established supplier is likely to offer him a better price, realizing that he is losing important business.

6. Non-collusion agreements

Suppliers should be required to sign a non-collusion agreement as part of the bidding documents. Fear of being disqualified from the bidding process may deter suppliers from collaborating with each other and thus may break up the cartel. You may also consider creating private incentives for cartel members to pit one member against another. And ultimately, if the supplier’s power has increased substantially and the chances of breaking up a cartel are low, you can start looking at alternative products.