An Experimental Study of Procurement Auctions with Endogenous Minimum Prices

Abstract

Several European countries and many Japanese local governments began including endogenous minimum prices (EMPs) in first-price auctions (FPAs) in their public procurements. The EMP is calculated based on its relation to the average of all bids or to some lowest bids. Any bid lower than the EMP is considered abnormally low and is excluded from the procurement procedure. Producers who join this new auction institution have the incentive to raise their bids and pull up the EMP in order to exclude others. A theoretical analysis reveals that the EMP does not affect winning bids but changes the Nash equilibria of the standard FPA that does not have any minimum prices. A laboratory analysis reveals that the winning bids of this new auction institution (i) are close to the production cost and coincide with those of the standard FPA under the identical cost condition and (ii) are higher than the lowest production cost and those of the standard FPA under our different cost condition when subjects' identifications and bids are revealed.

Keywords: Public procurement, First-price auction, Experiment, Abnormally low tender, Endogenous minimum price

JEL Classification: C92, D44, L15