Balancing the Bids, Solutions for Unit Price Auctions (original) (raw)
Related papers
Comparing public procurement auctions
International Economic Review, 59(2), 391-419, 2018
This article contrasts two auction formats often used in public procurement: first price auctions with ex post screening of bid responsiveness and average bid auctions (ABAs), in which the bidder closest to the average bid wins. The equilibrium analysis reveals that their ranking is ambiguous in terms of revenues, but the ABA is typically less efficient. Using a data set of Italian public procurement auctions run alternately under the two formats, a structural model of bidding is estimated for the subsample of first price auctions and used to quantify the efficiency loss under counterfactual ABAs.
Tender Evaluation and Award Methodologies in Public Procurement
SSRN Electronic Journal, 2000
The EU procurement directives stipulate that public contracts are awarded to the lowest bidder or to the bidder with the economically most advantageous offer; the latter requiring that a scoring rule must be specified. We provide a simple theoretical framework for tender evaluation and discuss the pros and cons of common scoring rules, e.g., highest quality (beauty contest) and price-and-quality-based evaluation. Some descriptive facts are presented for a sample of Swedish public procurements. We argue that the most common method, price-to-quality scoring, is flawed for several reasons. It is non-transparent, making accurate representation of the procurer's preferences difficult. It is often open to strategic manipulation, due to dependence on irrelevant alternatives, and it is unreasonably non-linear in bid prices. We prefer quality-to-price scoring, where money values are assigned to different quality levels. When the costs of quality are relatively well-known, however, lowest price is the preferable award criteria.
REDUCING THE COSTS OF PUBLIC TENDERS: A MODEST PROPOSAL
2008
While in the private sector the buyer chooses the number of potential suppliers to involve in an exchange, in the public sector the procedures to follow usually oblige the purchasing manager to behave in a different way. According to the European Directive 2004/18/EC, the Public Administration has to consider all the bids belonging to all the suppliers willing, and able, to take part into the trade. The main purpose of the law is to increase the competitiveness among several bidders in order to reduce the public spending, avoiding monopolistic or oligopolistic behaviours. However the legislator has not taken into account the costs associated with participation in the single tender. In the paper we underline that these costs are relevant and so by limiting the number of bidders it is possible to save money both for the Public Administration and the private sector.
An Investigation of the Average Bid Mechanism for Procurement Auctions
Management Science, 2014
In a procurement context, it can be quite costly for a buyer when the winning seller su¤ers from the Winner's Curse, underestimates the cost of a project and then defaults on the project midway through completion. Auctioneers have developed a number of ways to help combat this problem including the Average Bid Auction. This format involves awarding the contract to the bidder who has bid closest to the average of the bids submitted. We compare the performance of this mechanism with the standard Low Price mechanism to determine how successful the Average Bid format is in preventing bidder losses as well as its impact on the price paid by the buyer. We …nd that the Average Bid mechanism is quite successful at preventing bidder losses and the price premium is lower than expected.
Tender evaluation and supplier selection methods in public procurement
Journal of Purchasing and Supply Management, 2013
The EU procurement directives stipulate that public contracts be awarded to the lowest bidder or to the bidder with the economically most advantageous tender; the latter requiring that a scoring rule be specified. We provide a simple theoretical framework, based on standard microeconomic theory, for tender evaluation (scoring and weighing) and discuss the pros and cons of methods such as highest quality (beauty contest), lowest price and price-and-quality-based evaluations. We argue that the most common method, price-to-quality scoring, is inappropriate for several reasons. It is non-transparent, making accurate representation of the procurer's preferences difficult. It is often open to strategic manipulation, due to dependence on irrelevant alternatives, and it tends to impose particular and unjustified non-linearity in bid prices. The alternative quality-to-price scoring method, where money values are assigned to different quality levels, is a better alternative. However, when the cost of quality is relatively well-known and several providers can offer optimal quality, lowest price is the preferable supplier selection method, while beauty contests may be preferred when purchasing budgets are inflexible.
On the Value of Competition in Procurement Auctions
Econometrica, 2002
It is commonly stated that ascending price or second price auctions allocate goods e±ciently, to those who value them most. This implies that the more bidders at the auction stage the more e±cient the¯nal allocation. We review this statement when bidders have private information both on a private element and a common element. While the¯nal allocation need not be ex post e±cient, we show that when bidders are ex ante symmetric, more competition at the auction yields higher e±ciency on expectation. When bidders are ex ante asymmetric-in particular with respect to the information on the common element-the statement need no longer be true.
Awarding Price, Contract Performance, and Bids Screening: Evidence from Procurement Auctions
American Economic Journal: Applied Economics, Vol. 6, Iss. 1, pp. 108-132. , 2014
This paper presents evidence on the perverse trade-off that first price auctions induce between low prices at the awarding stage and poor ex post performance when bids are not binding commitments. By exploiting the different timing with which first price auctions were introduced in Italy to procure public works, this study finds that at least half of the cost savings from lower winning prices are lost because of ex post renegotiation. Screening the lowest price bid for its responsiveness prevents performance worsening but also reduces the initial cost savings by a third and induces delays in awarding the contract.
Nispacee Journal of Public Administration and Policy, 2015
Th rough the institute of public procurement a considerable volume of fi nancial resources is allocated. It is therefore in the interest of contracting entities to seek ways of how to achieve an effi cient allocation of resources. Some public contractawarding entities, along with some public-administration authorities in the Czech Republic, believe that the use of a single evaluation criterion (the lowest bid price) results in a more effi cient tender for a public contract. It was found that contracting entities in the Czech Republic strongly prefer to use the lowest bid price criterion. Within the examined sample, 86.5 % of public procurements were evaluated this way. Th e analysis of the examined sample of public contracts proved that the choice of an evaluation criterion, even the preference of the lowest bid price criterion, does not have any obvious impact on the fi nal cost of a public contract. Th e study concludes that it is inappropriate to prefer the criterion of the lowest bid price within the evaluation of public contracts that are characterised by their complexity (including public contracts for construction works and public service contracts). Th e fi ndings of the Supreme Audit Offi ce related to the inspection of public contracts indicate that when using the lowest bid price as an evaluation criterion, a public contract may indeed be tendered with the lowest bid price, but not necessarily the best off er in terms of supplied quality. It is therefore not appropriate to use the lowest bid price evaluation criterion to such an extent for the purpose of evaluating work and services. Any improvement to this situation requires a corresponding amendment to the Law on Public Contracts and mainly a radical change in the attitude of the Offi ce for the Protection of Competition towards proposed changes, as indicated within the conclusions and recommendations proposed by this study.
Incentives and award procedures: competitive tendering vs. negotiations in procurement
Handbook of Procurement, 2006
Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we offer a framework that first describes the buyer's choice of contracts, and then links this choice to the selection of competitive tendering or negotiations. The analysis suggests a number of possible limitations to the use of competitive tendering. These may perform poorly when projects are complex, contractual design is incomplete and there are few available bidders. Furthermore, competitive tendering may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project. Implications of these results for procurement in the private and public sector are discussed. * This is a preliminary version of a future chapter to appear in Dimitri, Piga, and Spagnolo (Eds.) "Handbook of Procurement", forthcoming in Manufactured goods, such as computers, TVs and automobiles are mass produced, have standardized characteristics and are typically purchased at list price. Other goods, such as new buildings, fighter jets, custom software or consulting services are tailored to fit a procurer's specific and often unique needs. To procure these customized goods, the procurer hires a contractor who supplies the good according to a set of desired specifications. We call this the procurement problem.