Entry and Bidding in Common and Private Value Auctions with an Unknown Number of Rivals
Dakshina G. De Silva
Department of Economics, Lancaster University Management School
Thomas D. Jeitschko
Michigan State University - Department of Economics
University of Oklahoma - Department of Economics
December 23, 2008
In many procurement auctions bidders do not know how many rivals they face at the time they incur the cost of preparing their bids. We show in a theoretical model that regardless of whether the procurement is characterized by private or by common values an increase in the potential number of bidders may lead to higher procurement costs. This raises potential policy questions of whether and how entry should be encouraged in public procurement auctions.
We use evidence from auctions of construction contracts to estimate the effect of an increase in the pool of potential bidders on entry and auction prices when entry and bidding decisions are made sequentially with no knowledge of the number or identity of the actual competitors.
Number of Pages in PDF File: 24
Keywords: Procurement Auctions, Private Values, Common Values, Endogenous Entry
JEL Classification: H4, H57, D44
Date posted: September 5, 2008 ; Last revised: January 13, 2009