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An Experimental Study of Procurement Auctions with Endogenous Minimum Prices

Listed author(s):
  • Kenju Akai
  • Tatsuyoshi Saijo
  • Shigehiro Serizawa

Several European countries and many Japanese local governments began including endogenous minimum prices (EMPs) in first-price auctions (FPAs) in their public procurements. The EMP is calculated based on its relation to the average of all bids or to some lowest bids. Any bid lower than the EMP is considered abnormally low and is excluded from the procurement procedure. Producers who jointhis new auction institution have the incentive to raise their bids and pull upthe EMP in order to exclude others. A theoretical analysis reveals that the EMPdoes not affect winning bids but changes the Nash equilibria of the standard FPA that does not have any minimum prices. A laboratory analysis reveals that the winning bids of this new auction institution (i) are close to the production cost and coincide with those of the standard FPA under the identical cost conditionand(ii) are higher than the lowest production cost and those of the standard FPA under our different cost condition when subjects' identifications and bids are revealed.

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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0743r.

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Date of creation: Jul 2009
Date of revision: Jul 2010
Handle: RePEc:dpr:wpaper:0743r
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