Competitive bidding with entry costs (original) (raw)

Procurement auctions with entry of bidders

International Journal of Industrial Organization, 2000

In procurement auctions with a fixed number of bidders there is a tradeoff between cost efficiency and rent extraction. An optimal mechanism, therefore, entails distortions of effort . If potential suppliers must sink an entry investment before they can participate in the auction, then decreasing the firms' rent may imply reduced entry. We show that if potential bidders are uninformed before entry, commitment to a plain, nondistortive auction is optimal. In contrast, if potential bidders learn all their private information before entry, the optimal mechanism entails the same distortions as in Laffont and Tirole's static model.

Entry and R&D Costs in Competitive Procurements and Contracting

A model of competitive procurements and contracting is presented. The key features of the model include pre-contract R&D, an endogenous number of symmetric firms, and a first-price sealed-bid procurement auction. The unique symmetric perfect free-entry equilibrium is characterized. If the R&D technology is variable scale with constant marginal returns, it is socially optimal for one firm to do all of the R&D and production. However, since the buyer considers only his own cost of procurement, the buyer will prefer to allow free entry, and the number of firms will usually be larger than is socially optimal. If the R&D technology is fixed-scale, the buyer's choices will be socially optimal if the buyer's opportunity cost of an alternative procurement is high. On the other hand, if the opportunity cost is low the buyer will choose a reservation price lower than the socially optimal value and a number of firms no larger than the socially optimal number. Certainly, the type of R&D technology plays an important role in determining optimal R&D and procurement policies for the buyer and for society.

Procurement with costly bidding, optimal shortlisting, and rebates

Economics Letters, 2008

We consider the procurement of a complex, indivisible good when bid preparation is costly, assuming a population of heterogeneous contractors. Shortlisting is introduced to implement the optimal number of bidders, and we explore whether the procurer should reimburse the nonrecoverable cost of preparing a bid in whole or in part. We find that a reimbursement policy is profitable for the procurer only if performance and bidding costs are negatively correlated. Moreover, negative rebates (entry fees) always dominate positive rebates.

Entry and Subcontracting in Public Procurement Auctions

Management Science, Vol. 61, Iss. 12, pp. 2945–2962, 2015

We empirically study how the interplay between entry and subcontracting choices is affected by the use of different auction formats in public procurement. The difference-in-differences strategy used exploits a data set of auctions for public works run alternately under first price and average bid auctions. We find that the use of first-price auctions causes a marked decline in both entry and sub-contracting. We also find that the type of firms entering first price auctions changes with firms becoming more likely to bid jointly with other firms in ad hoc joint ventures.

Procurement bidding with restrictions

Quantitative Marketing and Economics, 2007

In many procurement situations with simultaneously offered projects, firms face participation restrictions and can bid only on a subset of the projects. This phenomenon is prevalent in a variety of observed situations such as bidding for private label supplies, business to business procurement or government projects. We show that for the case of n bidding firms where each is restricted to bid on a subset of the offered projects, there exists a symmetric equilibrium in which each bidder has a positive expected equilibrium profit. Prices are bounded away from marginal costs even if all the bidders are homogenous. this results from the fact that there is a positive probability that each firm will find itself in the position of being the sole bidder on a project. While the equilibrium probability of bidding on a project increases with its value, it is interesting to note that the bidding probability on the projects approaches an equiprobable one as the number of bidding firms increases. We find that the equilibrium profits decrease as firms are able to bid on more of the available projects. In contrast, bidder commitment to bid on specific projects increases the equilibrium profits of all firms. We also examine the effect of heterogeneity on equilibrium profits. Greater heterogeneity in the project valuations leads to lower firm profits. On the other hand, heterogeneity among bidders in terms of the number of projects that they are constrained to bid on leads to greater profits for the firms that can bid on more projects (regardless of the mix of the firms in the industry.) Finally, we analyze the effect of uncertainty in project valuations and show greater uncertainty in project valuations (as represented by a mean preserving spread) decreases the equilibrium profits. We conclude with an empirical analysis of bidding behavior that tests the predictions of the theory. We find that the probability of bidding on a particular project is increasing in its value, decreasing in the other projects values and decreasing in the number of bidding subjects. Furthermore, the value of the bids on a project increase with its valuation and decrease with the total number of bidders.

Entry and Bidding in Common and Private Value Auctions with an Unknown Number of Rivals

Review of Industrial …, 2009

In many procurement auctions bidders do not know how many rivals they face at the time that they incur the cost of preparing their bids. We show in a theoretical model that regardless of whether the procurement is characterized by private or by common values an increase in the potential number of bidders may lead to higher procurement costs. This raises potential policy questions of whether and how entry should be encouraged or limited in public procurement auctions. We use evidence from auctions of construction contracts to estimate the effect of an increase in the pool of potential bidders on entry and auction prices when entry and bidding decisions are made sequentially with no knowledge of the number or identity of the actual competitors.

Optimal Auctions of Procurement Contracts

Organizational Economics Proceedings, 2014

We consider tenders/auctions for the procurement of items that do not exist at the time of the tender. The cost of production is subject to ex-post shocks, i.e. cost overruns, which cannot be contracted away or insured at the time of tender. The contractors may default due to the cost overruns once the project is underway. We consider a simple contract that speci…es the payment in case of default and the award that is paid upon successful project completion. This contract is allocated at the tender and the award part is determined by competitive bidding. We characterize bidding behavior of contractors in standard tenders and derive the implications for the buyer's expected cost minimization.

Market Entry in Public Procurement

2021

Abstract—This study analyzed market entry timing based on the procurement data of construction works of the eight Regional Development Bureaus of Japan’s Ministry of Land, Infrastructure, Transport and Tourism. After reviewing key aspects, a regression analysis was performed on the possible factors leading to entry. We found that when an efficient company enters the market, the number of bids is large and there are many tender participants, regardless of the previous bid rate and predetermined planned price trend.

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.

The effect of information on the bidding and survival of entrants in procurement auctions

Journal of Public Economics, 2009

In government procurement auctions of construction contracts, entrants are typically less informed and bid more aggressively than incumbent …rms. This bidding behavior makes them more susceptible to losses a¤ecting their prospect of survival. In April of 2000, the Oklahoma Department of Transportation started releasing the internal cost estimates to complete highway construction projects. Using newly developed quantile regression approaches, this paper examines the impact of the policy change on aggressive entrants. First, we …nd that the information release eliminates the bidding di¤erential between entrants and incumbents attributed to informational asymmetries. Second, we argue that the policy change a¤ects the prospects of survival of entrants in the market. We …nd that those who used to exit the market relatively soon are now staying 37 percent longer, while at the median level bidding duration increased by roughly 68 percent. The policy has the potential to encourage entry in government procurement auctions and thus increase competition.