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Investigating bid preferences at low-price, sealed-bid auctions with endogenous participation

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  • Hubbard, Timothy P.
  • Paarsch, Harry J.

Abstract

At procurement auctions, with bid preferences, qualified firms are treated special. A common policy involves scaling the bids of preferred firms by a discount factor for the purposes of evaluation only. Introducing such an asymmetry has three effects: first, preferred firms may inflate their bids, yet still win the auction; second, nonpreferred firms may bid more aggressively than in the absence of preferences; third, the preference policy can affect participation. For different cost distributions, we solve numerically for the equilibrium bid functions under different discounts and then simulate behaviour. Our approach allows us to quantify the relative importance of the three effects. We find that the participation effect is relatively unimportant and, in most cases, a positive cost-minimizing preference rate exists.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 1 (January)
Pages: 1-14

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Handle: RePEc:eee:indorg:v:27:y:2009:i:1:p:1-14

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: Low-price Sealed-bid auctions Bid preferences Procurement Endogenous participation;

References

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  1. Maskin, Eric & Riley, John, 2000. "Equilibrium in Sealed High Bid Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 439-54, July.
  2. Guofu Tan & Okan Yilankaya, 2005. "Equilibria in Second Price Auctions with Participation Costs," IEPR Working Papers 05.7, Institute of Economic Policy Research (IEPR).
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  10. Philip J. Reny & Shmuel Zamir, 2004. "On the Existence of Pure Strategy Monotone Equilibria in Asymmetric First-Price Auctions," Econometrica, Econometric Society, vol. 72(4), pages 1105-1125, 07.
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  12. Patrick Bajari, 2001. "Comparing competition and collusion: a numerical approach," Economic Theory, Springer, vol. 18(1), pages 187-205.
  13. Marion, Justin, 2007. "Are bid preferences benign? The effect of small business subsidies in highway procurement auctions," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1591-1624, August.
  14. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
  15. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
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  17. Holt, Charles A, Jr, 1980. "Competitive Bidding for Contracts under Alternative Auction Procedures," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 433-45, June.
  18. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
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Citations

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Cited by:
  1. De Silva, Dakshina G. & Dunne, Timothy & Kosmopoulou, Georgia & Lamarche, Carlos, 2012. "Disadvantaged business enterprise goals in government procurement contracting: An analysis of bidding behavior and costs," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 377-388.
  2. Vivek Bhattacharya & James W. Roberts & Andrew Sweeting, 2013. "Regulating Bidder Participation in Auctions," NBER Working Papers 19352, National Bureau of Economic Research, Inc.
  3. Domenico Colucci & Nicola Doni & Vincenzo Valori, 2012. "Information revelation in procurement auctions: an equivalence result," Working Papers - Mathematical Economics 2012-07, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  4. Shneyerov, Artyom & Wong, Adam Chi Leung, 2011. "Identification in first-price and Dutch auctions when the number of potential bidders is unobservable," Games and Economic Behavior, Elsevier, vol. 72(2), pages 574-582, June.
  5. Elena Krasnokutskaya, 2012. "Multi-Attribute Auctions with Unobserved Heterogeneity in Supplier Qualities and Buyers Tastes," 2012 Meeting Papers 283, Society for Economic Dynamics.
  6. Timothy P. Hubbard & Harry J. Paarsch, 2012. "On the Numerical Solution of Equilibria in Auction Models with Asymmetries within the Private-Values Paradigm," Carlo Alberto Notebooks 291, Collegio Carlo Alberto.
  7. Hirata, Daisuke, 2014. "A model of a two-stage all-pay auction," Mathematical Social Sciences, Elsevier, vol. 68(C), pages 5-13.
  8. Timothy P. Hubbard & Rene Kirkegaard & Harry J. Paarsch, 2011. "Using Economic Theory to Guide Numerical Analysis: Solving for Equilibria in Models of Asymmetric First-Price Auctions," Carlo Alberto Notebooks 207, Collegio Carlo Alberto.
  9. Li, Sherry Xin & Dogan, Kutsal & Haruvy, Ernan, 2011. "Group identity in markets," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 104-115, January.
  10. De Silva, Dakshina G. & Hubbard, Timothy P. & Kosmopoulou, Georgia, 2013. "Efficacy of a Bidder Training Program: Lessons from LINC," MPRA Paper 51329, University Library of Munich, Germany.
  11. Alcalde, José & Matthias, Dahm, 2011. "Competition for Procurement Shares," QM&ET Working Papers 11-3, Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica.
  12. Domenico Colucci & Nicola Doni & Vincenzo Valori, 2012. "Preferential treatment in procurement auctions through information revelation," Working Papers - Mathematical Economics 2012-06, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  13. Aryal, Gaurab & Gabrielli, Maria F., 2013. "Testing for collusion in asymmetric first-price auctions," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 26-35.

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