Local Cost Synergies in Reverse Auctions: An Application to Road Salt Procurement
31 Pages Posted: 13 Aug 2019 Last revised: 15 Jun 2023
Date Written: August 9, 2019
Abstract
In many simultaneous auction settings, such as government procurement auctions, there may be linkages across items in that the value a bidder places on one item depends on whether the same bidder also wins other items. Applying this idea to the context of auctions run by Minnesota’s Department of Transportation (MnDOT), we show how firms’ observed bidding behavior can be used to infer the existence and quantitative magnitude of these cross-auction linkages. MnDOT holds auctions annually to procure road salt for each of its depots (storage facilities) located throughout the state. Our empirical results indicate substantial local cost synergies: large firms' bids reflect a strong preference for winning co-located depots. We estimate that, on average, large firms' bids are about 9 percent lower than they would have been absent local cost synergies. However, local cost synergies also substantially reduce the competitiveness of small firms (for which we do not detect local cost synergies). To restore small firms' competitiveness to what it would have been absent large firms' local cost synergies, we estimate that MnDOT would have to institute a small-firm bid preference of at least 12 percent. Our results therefore help inform the design of real-world auction policies that favor certain bidders, such as small business preference programs.
Keywords: reverse auction, structural estimation
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