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Bid avarage methods in Procurement

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Author Info
Spagnolo, Giancarlo
Albano, Gian Luigi
Bianchi , Milo

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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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File URL: http://mpra.ub.uni-muenchen.de/8997/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8997.

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Date of creation: 2006
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Handle: RePEc:pra:mprapa:8997

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
H76 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other Expenditure Categories

References listed on IDEAS
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  1. Paul Klemperer, 2004. "Auctions: Theory and Practice," Economics Papers 2004-W09, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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  1. 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. [Downloadable!]
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