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Skew to win, not to profit – unbalanced bidding among informed bidders

Author

Listed:
  • Johan Nyström
  • Svante Mandell

Abstract

Purpose - Several sectors, especially the construction industry, use unit price contracting (UPC). This contracting form provides agents, ex ante, with estimated quantities of the work to be done. Competing agents then offer corresponding unit prices i.e. the bid is a price vectors, and most often the lowest vector sum is awarded the contract. This way of procuring is not only transparent but also entails a potential problem of unbalanced bidding. Unbalanced bidding occurs when an informed agent skews unit prices to win the ex ante bid. The concept is not new topic in research, but theoretical models from an economics perspective are not extensive. Design/methodology/approach - This paper will focus on how competition among informed bidders will affect the optimal solution. Findings - It is shown that skewing is still a dominating strategy under competition. However, competition will decrease, but not necessarily eliminate, information rents. Originality/value - In this setting, unbalanced bidding could mainly be seen as a way to win the contract and not to extract information rents. Thus, it would not constitute an efficiency problem for the client.

Suggested Citation

  • Johan Nyström & Svante Mandell, 2019. "Skew to win, not to profit – unbalanced bidding among informed bidders," Journal of Public Procurement, Emerald Group Publishing Limited, vol. 19(1), pages 46-54, March.
    • Handle: RePEc:eme:jopppp:jopp-03-2019-024
    DOI: 10.1108/JOPP-03-2019-024
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