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Split-Award Procurement Auctions with Uncertain Scale Economies: Theory and Data

Author

Listed:
  • James J. Anton
  • Sandro Brusco
  • Giuseppe Lopomo

Abstract

In a number of observed procurements, the buyer has employed an auction format that allows for a split-award outcome. We focus on settings where the range of uncertainty regarding scale economies is large and, depending on cost realizations, the efficient allocations include split-award outcomes as well as sole-source outcomes (one active supplier). We examine the price performance and efficiency properties of split-award auctions under asymmetric information. In equilibrium, both award outcomes can occur--the split-award outcome arises only when it minimizes total costs; sole-source outcomes, however, occur too often from an efficiency viewpoint. Equilibrium bids involve pooling at a common price for the split award, and separation for sole-source awards. We provide conditions under which the buyer and suppliers all benefit from a split-award format relative to a winner-take-all unit auction format. Model predictions are assessed with data on submitted ‘step-ladder’ bid prices for a US defense split-award procurement.

Suggested Citation

  • James J. Anton & Sandro Brusco & Giuseppe Lopomo, 2010. "Split-Award Procurement Auctions with Uncertain Scale Economies: Theory and Data," Working Papers 10-32, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:10-32
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    Cited by:

    1. Gong, Jiong & Li, Jianpei & McAfee, R. Preston, 2012. "Split-award contracts with investment," Journal of Public Economics, Elsevier, vol. 96(1), pages 188-197.
    2. Jose Alcalde & Matthias Dahm, 2016. "Proportional payoffs in legislative bargaining with weighted voting: a characterization," Discussion Papers 2016-03, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    3. B. Cesi & M. Lorusso, 2020. "Collusion in public procurement: the role of subcontracting," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 37(1), pages 251-265, April.
    4. Mahdi Mahmoudzadeh & Aadhaar Chaturvedi, 2024. "A Behavioral Model of Responsible Sourcing in Supply Chains: The Role of Dual-Sourcing Bias," Decision Analysis, INFORMS, vol. 21(4), pages 196-214, December.
    5. Alcalde, José & Dahm, Matthias, 2013. "Competition for procurement shares," Games and Economic Behavior, Elsevier, vol. 80(C), pages 193-208.
    6. Feng, Xin & Lu, Jingfeng, 2018. "How to split the pie: Optimal rewards in dynamic multi-battle competitions," Journal of Public Economics, Elsevier, vol. 160(C), pages 82-95.
    7. Cheaitou, Ali & Larbi, Rim & Al Housani, Bashayer, 2019. "Decision making framework for tender evaluation and contractor selection in public organizations with risk considerations," Socio-Economic Planning Sciences, Elsevier, vol. 68(C).
    8. Alejandro Francetich, 2013. "Becoming the Neighbor Bidder: Endogenous Winner’s Curse in Dynamic Mechanisms," Working Papers 501, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. Fugger, Nicolas & Laitenberger, Ulrich, 2020. "Split-award auctions and supply disruptions," ZEW Discussion Papers 20-082, ZEW - Leibniz Centre for European Economic Research.
    10. Alcalde, José & Dahm, Matthias, 2019. "Dual sourcing with price discovery," Games and Economic Behavior, Elsevier, vol. 115(C), pages 225-246.
    11. Alan Gelder & Dan Kovenock & Brian Roberson, 2022. "All-pay auctions with ties," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(4), pages 1183-1231, November.
    12. Aadhaar Chaturvedi & Damian R. Beil & Victor Martínez-de-Albéniz, 2014. "Split-Award Auctions for Supplier Retention," Management Science, INFORMS, vol. 60(7), pages 1719-1737, July.
    13. Alejandro Francetich, 2015. "Becoming the Neighbor Bidder: Endogenous Winner's Curse in Dynamic Mechanisms," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 45-76, May.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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