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Bid Average Methods in Procurement

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Author Info

  • Gian Luigi Albano

    ()
    (Consip S.p.A., Rome)

  • Milo Bianchi

    ()
    (Stockholm School of Economics)

  • Giancarlo Spagnolo

    ()
    (Consip S.p.A., Rome and Stockholm School of Economics)

Abstract

Procurement awarding mechanisms based on average price have been advocated to soften price competition and reduce cost overruns. We show that their theoretical support is shaky. When the bid closest to the average is awarded, firms submit identical bids, making the selection extremely costly and random, without reducing opportunistic behaviors ex-post. When instead the bid closest and below the average is awarded, the equilibrium is very sensitive to firms' production and participation costs. Either it displays tougher competition than in a first price auction, or it induces firms to randomize their bids.

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Bibliographic Info

Article provided by SIPI Spa in its journal Rivista di Politica Economica.

Volume (Year): 96 (2006)
Issue (Month): 1 (January-February)
Pages: 41-62

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Handle: RePEc:rpo:ripoec:v:96:y:2006:i:1:p:41-62

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References

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  1. R. Preston McAfee & John McMillan, 1986. "Bidding for Contracts: A Principal-Agent Analysis," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 326-338, Autumn.
  2. Paul Klemperer, 2004. "Auctions: Theory and Practice," Economics Papers 2004-W09, Economics Group, Nuffield College, University of Oxford.
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Cited by:
  1. Alessandro Bucciol & Ottorino Chillemi & Giacomo Palazzi, 2011. "Cost Overrun and Auction Format in Public Works," Working Papers 17/2011, University of Verona, Department of Economics.
  2. Decio Coviello & Mario Mariniello, 2008. "Does Publicity Affect Competition? Evidence from Discontinuities in Public Procurement Auctions," CSEF Working Papers 189, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Ottorino Chillemi & Claudio Mezzetti, 2014. "Optimal procurement mechanisms: bidding on price and damages for breach," Economic Theory, Springer, vol. 55(2), pages 335-355, February.
  4. Gian Luigi Albano & Federico Dini & Roberto Zampino, 2008. "Bidding for Complex Projects: Evidence From the Acquisitions of IT Services," Working Papers 2008.86, Fondazione Eni Enrico Mattei.
  5. Maris Goldmanis & Antonio Penta & Francesco Decarolis, 2012. "Common Agency and Coordinated Bids in Sponsored Search Auctions," 2012 Meeting Papers 106, Society for Economic Dynamics.
  6. Bergman, Mats & Lundberg, Sofia, 2011. "Tender Evaluation and Award Methodologies in Public Procurement," UmeÃ¥ Economic Studies 821, Umeå University, Department of Economics.
  7. Bucciol, Alessandro & Chillemi, Ottorino & Palazzi, Giacomo, 2013. "Cost overrun and auction format in small size public works," European Journal of Political Economy, Elsevier, vol. 30(C), pages 35-42.

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