http://www.city-journal.org/html/8_2_a2.html

            Ian Ayres’ book Super Crunchers: Why Thinking by Numbers is the New Way to be Smart delves into many different aspects of networks from Prisoner’s Dilemma to the greater structure of search engines.  What truly grabbed my attention was a chapter on school construction in New York City.  Under the New York City School Construction Authority, builders take part in a sealed bid auction to see who gains the rights to build the school.  The builders submit their bids to the contract specialist, who would open and announce the bids, with the lowest bidder procuring the contract.  During 1992, it was found that some bidders took part in the “magic number” scam.  In this scam, the dishonest bidder would bid the lowest amount for which they could possibly complete the project.  They would hand their bid to the contract specialist, who is in on it.  The contract specialist would put this bid at the bottom of the stack.  The contract specialist would read out the honest bids until he reached the last one.  If the dishonest bid was still not the lowest, the contract specialist would read the bid as written.  However, if the dishonest bid was lower, the contract specialist would read out a price only slightly lower than the second lowest bid and replace the bid on the card with the new bid.  This means that the dishonest company would gain the difference in profit.  By willing to do the job for the lowest price, but getting paid the highest possible price, they basically transformed the auction into a reverse second price auction.  The seven firms that took part in the scam won over $23 million worth of work.

            It was discovered that using networks could also be used to apprehend other magic number scan artists.  After the initial group was apprehended, people with an expertise in auctions realized that the margin of victory for these illicit auctions were much smaller than usual, since that would garner the most profit.  They used the networks interconnecting different auction groups to gain large amounts of statistical data and created a statistical regression.  By looking at the margins of victory for auctions run by different contract specialists, they were able to apprehend two more contract specialists taking part in the “magic numbers” scam.

            So knowledge of auctions allowed a group of people to defraud the City of New York, but, in the end, networks also led to their capture.