Academic journal article Contemporary Economic Policy

Bids and Costs in Combinatorial and Noncombinatorial Procurement Auctions-Evidence from Procurement of Public Cleaning Contracts

Academic journal article Contemporary Economic Policy

Bids and Costs in Combinatorial and Noncombinatorial Procurement Auctions-Evidence from Procurement of Public Cleaning Contracts

Article excerpt

I. INTRODUCTION

Auctions in which bidders are allowed to submit bids on combinations (or packages) of contracts have received substantial attention in recent years, in both practice and theory (Abrache et al. 2007; Cantillon and Pesendorfer 2006; Cramton, Shoham, and Steinberg 2006; De Vries and Vohra 2003; Epstein et al. 2004; Sheffi 2004). Combinatorial procurement auctions are increasingly being employed in both the private and public sector as an alternative to simultaneous auctions of individual contracts. The mechanism enables suppliers to express synergies across bundles of contracts, which mitigates the exposure problem (Pekec and Rothkopf 2003) and putatively has the potential to both lower the procurer's cost and enhance efficiency.

However, combinatorial auctions are very complex. Beside the inherent potential computational problem in determining the winner in a combinatorial auction (Nisan 2006), the auction mechanism is also strategically very complicated. When first-price combinatorial procurement auctions are practiced, bidders generally place both stand-alone bids on single contracts and bids on various packages of contracts. This implies that a bidder's stand-alone bids also will be competing with his combination bids. Hence, bidders might find it profitable to inflate their stand-alone bids, or refrain from submitting any, in order to increase the probability of winning with their combination bids. Therefore, an observed difference between the sum of a bidder's stand-alone bids on a particular set of contracts and her combination bid for the same set of contracts does not necessarily reflect the size of the underlying cost synergy.

In this paper we empirically study bidding behavior in first-price public procurement auctions of single and multiple contracts, where bidders in some of the multicontract auctions also have had the option to submit bids on combinations of contracts. In the combinatorial auctions studied, suppliers were free to bid for any combination of contracts but there had to be a submitted stand-alone bid for every contract being part of any combination. (1) The data analyzed in the paper are collected from both combinatorial procurement auctions and from multicontract auctions. In the latter auctions, bidders have submitted bids simultaneously on single contracts, where the evaluation of the bids on a specific contract has been done independently of the bids on any other contract. Data are also collected from procurement auctions where only a single contract has been auctioned out. (2) The same set of bidders is found in the combinatorial and in the standard auctions. As such we can compare the behavior of the bidders for different auction rules: package bidding allowed and not allowed, and evaluate the extent to which the package bid discount really reflects a cost reduction for the procuring entity. The procurement auctions studied consist of internal regular cleaning contracts. We argue that cost synergies across contracts are the motivation for the observed combination bids.

In the presence of synergies across items or contracts, the effect upon revenues or cost when allowing bidders to submit combination bids has been assessed in a number of experimental studies (see Chernomaz and Levin 2011, for a list of some previous experiments). However, few studies have provided equilibrium bidding strategies in environments of heterogeneous multiple items. In Krishna and Rosenthal (1996), it is shown that the simultaneous sealed-bid second-price auction with two objects and a single global bidder outperforms a corresponding combinatorial auction when synergies are present. The reason for this is that the global bidder engages in "overbidding," that is, bids above her value, facing the possibility of a loss ex post. A similar result is found in Kagel and Levin (2005), in which they derive and analyze bidding behavior in a sealed-bid uniform price auction when synergies are present. …

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