Economies of scale versus the costs of bundling in the procurement of highway pavement replacement

Although most public procurements involve decisions concerning bundling there is only a limited body of empirical research guiding policy on this matter. In this paper, we examine the cost effects of pure bundling in the competitive tendering of highway pavement replacement with hot-mix asphalt. For this we use linear regression on data from a comprehensive sample of such contracts procured by the Swedish infrastructure manager (IM) during the period 2012–2015. We find that bundling affects the procurer’s cost in multiple and partly counteracting ways. Our results show that economies of scale are strong but diminishing and counteracted by costs of bundling and bundling related factors. Overall, the findings support Swedish IM’s current design of bundles but also suggest that most of the contracts are still inefficiently small. Whilst not perfectly generalizable to other markets, the findings provide some support the increased promotion and use of bundling of small-scaled road rehabilitation projects in the US. Two main implications of the results are that bundling policy should emphasize proximity and similarity rather than whether work is small-scale and that the scope for efficient bundling should be accounted for when optimizing the timing of pavement replacement.