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Price Determination in Public Procurement: A Game Theory Approach

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  • Martin Schmidt

Abstract

The article examines mechanism of bid price determination in public procurement by individual tenderers. A game theory approach is used to analyse this process. Firstly, a simple model with two firms illustrates the influence of expected opponent's decision in bid price setting. Assumptions are released subsequently and a game theory based model describes price determination under assumption of expected profit maximization. It is shown that the bid price depends on the costs associated with the performance of the contract and the expected number of bidders. The relationship between the amount of the bid price and the number of bids is also confirmed on the findings of several empirical studies that are quoted.

Suggested Citation

  • Martin Schmidt, 2015. "Price Determination in Public Procurement: A Game Theory Approach," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2015(1), pages 49-62.
    • Handle: RePEc:prg:jnlefa:v:2015:y:2015:i:1:id:137
    DOI: 10.18267/j.efaj.137
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    References listed on IDEAS

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    1. James M. MacDonald & Charles R. Handy & Gerald E. Plato, 2002. "Competition and Prices in USDA Commodity Procurement," Southern Economic Journal, John Wiley & Sons, vol. 69(1), pages 128-143, July.
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    5. James M. MacDonald & Charles R. Handy & Gerald E. Plato, 2002. "Competition and Prices in USDA Commodity Procurement," Southern Economic Journal, Southern Economic Association, vol. 69(1), pages 128-143, July.
    6. De Silva, Dakshina G. & Kosmopoulou, Georgia & Lamarche, Carlos, 2009. "The effect of information on the bidding and survival of entrants in procurement auctions," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 56-72, February.
    7. İlke Onur & Rasim Özcan & Bedri Taş, 2012. "Public Procurement Auctions and Competition in Turkey," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(3), pages 207-223, May.
    8. Tong Li & Xiaoyong Zheng, 2009. "Entry and Competition Effects in First-Price Auctions: Theory and Evidence from Procurement Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(4), pages 1397-1429.
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    Cited by:

    1. Natalia Ferreira & Carina Pizzinat, 2025. "Framework agreements in Uruguay: towards an optimal acquisition strategy in public procurement," Documentos de Trabajo (working papers) 0125, Department of Economics - dECON.

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    JEL classification:

    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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