Procurement procedure, competition and final unit price: The case of commodities
| Published date | 01 March 2016 |
| Pages | 1-21 |
| DOI | https://doi.org/10.1108/JOPP-16-01-2016-B001 |
| Date | 01 March 2016 |
| Author | Jan Soudek,Jiří Skuhrovec |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 16, ISSUE 1, 1-21 SPRING 2016
PROCUREMENT PROCEDURE, COMPETITION AND FINAL UNIT PRICE:
THE CASE OF COMMODITIES
Jan Soudek and Jiří Skuhrovec*
ABSTRACT. We show how institutional and procedural characteristics affect
the final price in public procurement. In order to obt ain comparable unit
prices, our analysis examined public procurement of homogeneous goods
only. We examined two Czech commodity markets: electricity and natural
gas, which enabled us to use a private market price as a benchmark metric.
The regression analysis is based on the standard ordinary least squares
method. On a dataset of 277 tenders, we found that the final unit price of
the procurement is sensitive to movements in both commodity market price
and price estimated ex ante by the procurer. Moreover, we identified that
the final price is reduced when the procurer uses an open procedure, an
electronic auction, or attracts more competitors.
INTRODUCTION
Public procurement refers to the process of making purchases
and investments from public resources, which consist of about 15 %
of annual GDP in developed countries (OECD 2011). Public
procurement has several very important institutional characteristics
that differentiate it from private purchase processes and strongly
affect its overall efficiency.
Despite the significance of the topic, the volume of empirical
literature related to public procurement is relatively small. This is
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* Jan Soudek and Jiří Skuhrovec are Ph.D. Candidates at Institute for
Economic Studies, Charles University in Prague. Soudek’s research interest
is in economic analysis of current trends in p ublic procurement, with a focus
on optimal purchase mechanisms and potential sources of inefficiencies in
procurement processes. Al so founder and CEO of the EconLab (a non-profit
organization), Skuhrovec’s research interest is i n evidence based analysis of
public policies.
Copyright © 2016 by PrAcademics Press
2 SOUDEK & SKUHROVEC
partly a result of poor data availability, and may also result from the
wide variation of procured goods and services, which results in low
levels of comparability between individual procurement results. We
tried to overcome this obstacle by examining only a small subset of
contracts, where subject of trade is well-defined, measurable, and
has a solid price benchmark given by private markets; hence we
focus on the procurement of electricity and natural gas. By examining
those markets, we were able to compare the unit prices of particular
tenders and identify the significant differences between procurement
via an open procedure, where anyone can enter the competition, and
those by a negotiated procedure with a number of pre-selected
bidders. At the same time, we identified the effect of competition (the
number of bidders) on the final unit price. Last but not least, we
found a significant decrease in final unit price when procurement is
carried out by electronic auction (in comparison to a standard sealed
bid auction). Our analysis is, to the best of our knowledge, the first to
employ empirical analysis using a private market price as a
benchmark metric. Our results are relevant for both theoretical
discussion and daily practice in public procurement. Moreover, as the
legal framework we examined is common across the whole European
Union, our results should be applicable (at least) Europe-wide.
The paper is organized as follows: we introduce the topic with a
literature review. Our motivation for research and our methods are
presented in next section. After that, we give an overview of our
dataset with a data description where two public procurement
markets (electricity and natural gas) are analysed. Then the results of
our empirical study are presented and discussed. Finally, we
conclude and offer some policy suggestions.
LITERATURE REVIEW
The roots of economic literature in the field of public procurement
describe the process through auction theory. McAfee and McMillan
(1987), Bulow and Roberts (1989) or Maskin and Riley (1999)
attempted to describe optimal or sub-optimal strategies in
procurement procedures, with several assumptions given. Laffont
and Tirole (1993) and Che (1993) discussed an optimal procurement
process in terms of maximizing the procurer's expected payoff, and
showed that a scoring auction fulfils this requirement. However, Asker
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