Combinatorial auctions in public procurement: Experiences from sweden
| Published date | 01 March 2012 |
| Date | 01 March 2012 |
| DOI | https://doi.org/10.1108/JOPP-12-01-2012-B003 |
| Pages | 81-108 |
| Author | Anders Lunander,Sofia Lundberg |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 12, ISSUE 1, 81-108 SPRING 2012
COMBINATORIAL AUCTIONS IN PUBLIC PROCUREMENT:
EXPERIENCES FROM SWEDEN
Anders Lunander and Sofia Lundberg*
ABSTRACT. Combinatorial procurement auctions are increasingly being
employed in the private and public sector as an alternative to simultaneous
single contract auctions. This mechanism has the advantage that it enables
suppliers to express synergies across bundles of public contracts. This
mitigates the exposure problem and also has the potential to both lower the
price paid by the procuring authority and to enhance efficiency. This paper
provides stylized facts of recently performed combinatorial public
procurements in various markets in Sweden.
INTRODUCTION
In this paper, the design, implementation and outcome from a
number of combinatorial public procurement auctions of various
services are described. This is a relatively recently introduced auction
type where there are multiple contracts to be awarded in the same
tendering process. The combinatorial bidding mechanism is an
alternative to the simultaneous bidding mechanism in which
suppliers submit separate sealed bids for the contracts they are
interested in, with no possibility to condition the offered prices on the
outcome of other contracts. The supplier who has offered the most
----------------------------------
* Anders Lunander, Ph.D., is a Lecturer, School of Business, Örebro
University, Sweden. He teaches microeconomics and his research
interest is in auction theory with a special focus on public
procurement. Sofia Lundberg, Ph.D., is an Associate Professor,
Department of Economics, Umeå University, Sweden. She teaches
microeconomics and industrial organization and her research
interests are in public economics and public procurement auctions.
Copyright © 2012 by PrAcademics Press
82 LUNANDER & LUNDBERG
competitive bid on contract A is awarded that contract, the supplier
who has submitted the most competitive bid on contract B is awarded
that contract, and so on. Motivation for learning more about
combinatorial auctions is that the mechanism may take advantage of
the complementary nature of the contracts in terms of economies or
diseconomies of scale. It enables both smaller and larger suppliers to
bid more competitively on more contracts without being exposed to
the risk of winning too few or too many contracts. The option to
submit bids on bundles of contracts or to express maximum capacity,
when multiple contracts are auctioned out, has the potential to
reduce procurement costs, thus value is added to the procurer.
The strongest incentive for a procurer to apply the traditional
approach, that is to divide a procurement auction into separate
contracts with parallel bidding on each contract, is that few suppliers
– or sometimes none of them – would have the capacity to complete
the assignment if aggregated into one larger contract. Dividing the
large contract into smaller contracts is believed to increase the
competition from small- and medium-sized suppliers with limited
capacity. This is advantageous for both the supplier and the procurer
as long as the supplier’s costs for undertaking one or more of the
parts of the procurement are independent of how many contracts
each is awarded.1 If all the suppliers can be assumed to have a cost
structure wherein the average cost per contract does not depend on
how many contracts the supplier is awarded, but instead only varies
among suppliers, then the individual supplier’s strategy sets are the
same as if the tender had only concerned a single contract.
It is perhaps more realistic to assume that when simultaneously
bidding on several contracts, a supplier’s cost for fulfilling a specific
part of the tender depends on the number and volume of the
contracts awarded. In such a situation, a supplier choosing to bid on
several contracts of the tender faces more complex strategies than in
cases where the costs of different contracts are independent of each
other. It now becomes decisive how, and to what extent, the supplier
has an opportunity in the bidding process to convey that the
supplier’s costs, and consequently the prices offered, depend on how
much of the tender the supplier is awarded.
There are several alternative ways to design a bidding process
where multiple contracts are at stake in the same tender. It is
typically believed that the most effective method for tenders of
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