Different design - different cost: An empirical analysis of combinatorial public procurement bidding of road maintenance
| Date | 01 March 2012 |
| Pages | 407-422 |
| DOI | https://doi.org/10.1108/JOPP-12-03-2012-B005 |
| Published date | 01 March 2012 |
| 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 3, 407-422 FALL 2012
DIFFERENT DESIGN – DIFFERENT COST:
AN EMPIRICAL ANALYSIS OF COMBINATORIAL PUBLIC PROCUREMENT
BIDDING OF ROAD MAINTENANCE
Anders Lunander and Sofia Lundberg*
ABSTRACT. This paper is an empirical analysis of first-price sealed-bid
procurement auctions in Sweden, with and without combinatorial bidding.
The data comprises procurement auctions of identical contracts (road
resurfacing) with identical bidders conducted under the same time period
(2009-2011) in two different regions in Sweden. Given the comparison of
the suppliers’ offered price per tons of asphalt, we cannot reject the
hypothesis of identical distribution of standalone bids generated in both
types of auction. The distribution of package bids within the combinatorial
format is significantly lower than the distribution of standalone bids within
the non-combinatorial format, suggesting substantial cost reduction of
allowing package bidding. Also, within the combinatorial format, our analysis
of data indicates higher costs when packages are predetermined by the
purchaser rather than chosen freely by the suppliers.
INTRODUCTION
Combinatorial bidding has been applied in a number of public
procurement auctions in Sweden for the last ten years. The contracts
have comprised both goods and services. Overall, the bidding
mechanism has been the first-price sealed-bid format in which the
supplier can offer a discount if awarded a package of contracts,
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* Anders Lunander, Ph.D., is an Associate Professor, Department of
Economics, School of Business, Örebro University. 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 Economcis, Umeå University. She teaches
microeconomics and industrial organization and her research interests are
in public economics and public procurement auctions.
Copyright © 2012 by PrAcademics Press
408 LUNANDER & LUNDBERG
pre-determined by the purchaser or arbitrarily chosen by the supplier.
In many of these auctions, a supplier also had the option to express
limitations in her capacity to fulfill more that a certain number of
contracts auctioned out. In an addendum to her stand-alone bids on
single contracts, the supplier could state that she was only prepared
to accept a maximum number of contracts, contracts up to a given
maximum contract value or contracts up to a given maximum physical
volume. The combinatorial mechanism has the advantage that 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. Hence, the mechanism has the potential
to both lower the price paid by the procuring authority and enhance
efficiency.1
Within the first-price sealed-bid format, the purchaser may for
various reasons impose restrictions upon the bidding procedure when
combinatorial bids are allowed. Firstly, a supplier is often required to
place a standalone bid for every contract included in one or several
combinatorial bids. The reason is to avoid a potential unsolvable
allocation of contracts (the dead-lock problem).
Secondly, in order to reduce suppliers’ incentives to engage in
“predatory bidding”, the purchaser may limit the size of the maximum
discount allowed in a combinatorial bids. A salient feature with
combinatorial bidding is that a supplier’s standalone bid for a specific
contract, that also is part of one or several combinatorial bids, may
compete against the supplier’s own combinatorial bids. By placing
extremely high standalone bids on those contracts, in combination
with a combinatorial bid implying a very high discount, say 80 to 90
percent, a (global) supplier effectively blocks his standalone bids to
be part of any winning combination. In this way, a global supplier may
try to shut out those local suppliers, that to a large extend only submit
standalone bids, from the competition. Setting a limit on the
maximum discount forces the global supplier to place relatively low
standalone bids if he wishes to bid aggressively with his
combinatorial bids. As a result, the competitiveness of the standalone
bids of others is strengthened. Thirdly, the purchaser may restrict the
maximum number of contracts allowed to enter in a combinatorial bid
in order to reduce the competitive power of global bidders vis-a-vis
local bidders. The obvious potential drawback with the restrictions
aiming to reduce the power of global bidders is that the purchaser
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