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Combinatorial Auctions for Procurement: An Empirical Study of the Chilean School Meals Auction

Author

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  • Marcelo Olivares

    () (Columbia Business School, Columbia University, New York, New York 10027)

  • Gabriel Y. Weintraub

    () (Columbia Business School, Columbia University, New York, New York 10027)

  • Rafael Epstein

    () (Department of Industrial Engineering, University of Chile, 8370439 Santiago, Chile)

  • Daniel Yung

    () (Department of Industrial Engineering, University of Chile, 8370439 Santiago, Chile)

Abstract

In this paper we conduct an empirical investigation of a large-scale combinatorial auction (CA)--the Chilean auction for school meals in which the government procures half a billion dollars worth of meal services every year. Our empirical study is motivated by two fundamental aspects in the design of CAs: (1) which packages should bidders be allowed to bid on and (2) diversifying the supplier base to promote competition. We use bidding data to uncover important aspects of the firms' cost structure and their strategic behavior, both of which are not directly observed by the auctioneer; these estimates inform the auction design. Our results indicate that package bidding that allows firms to express their cost synergies due to economies of scale and density seems appropriate. However, we also found evidence that firms can take advantage of this flexibility by discounting package bids for strategic reasons and not driven by cost synergies. Because this behavior can lead to inefficiencies, it may be worth evaluating whether to prohibit certain specific combinations in the bidding process. Our results also suggest that market share restrictions and running sequential auctions seem to promote competition in the long run, without significantly increasing the short-run cost for the government due to unrealized cost synergies. Our results highlight that the simultaneous consideration of the firms' operational cost structure and their strategic behavior is key to the successful design of a CA. More broadly, our paper is the first to provide an econometric study of a large-scale CA, providing novel and substantive insights regarding bidding behavior in this type of auction. This paper was accepted by Martin Lariviere, operations management.

Suggested Citation

  • Marcelo Olivares & Gabriel Y. Weintraub & Rafael Epstein & Daniel Yung, 2012. "Combinatorial Auctions for Procurement: An Empirical Study of the Chilean School Meals Auction," Management Science, INFORMS, vol. 58(8), pages 1458-1481, August.
  • Handle: RePEc:inm:ormnsc:v:58:y:2012:i:8:p:1458-1481
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    File URL: http://dx.doi.org/10.1287/mnsc.1110.1496
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    References listed on IDEAS

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    Cited by:

    1. repec:oup:oxford:v:33:y:2017:i:4:p:541-571. is not listed on IDEAS
    2. Scott Duke Kominers & Alexander Teytelboym & Vincent P Crawford, 2017. "An invitation to market design," Oxford Review of Economic Policy, Oxford University Press, vol. 33(4), pages 541-571.
    3. Heczko, Alexander & Kittsteiner, Thomas & Ott, Marion, 2018. "The Performance of Core-Selecting Auctions: An Experiment," EconStor Preprints 176842, ZBW - German National Library of Economics.
    4. repec:spr:epolin:v:45:y:2018:i:1:d:10.1007_s40812-017-0088-3 is not listed on IDEAS
    5. Romero Morales, Dolores & Steinberg, Richard, 2014. "Revenue deficiency under second-price auctions in a supply-chain setting," European Journal of Operational Research, Elsevier, vol. 233(1), pages 131-144.
    6. Riccardo Camboni Marchi Adani & Paola Valbonesi, 2016. "Favouritism in scoring rule auctions," "Marco Fanno" Working Papers 0210, Dipartimento di Scienze Economiche "Marco Fanno".
    7. Kittsteiner, Thomas & Ott, Marion & Steinberg, Richard, 2017. "Competing Combinatorial Auctions," EconStor Preprints 171995, ZBW - German National Library of Economics.
    8. Ying Yao & Makoto Tanaka, 2016. "Price offers of pharmaceutical procurement in China: evidence from Guangdong province," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(5), pages 563-575, June.

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