An Experimental Study of Procurement Auctions with Endogenous Minimum Prices

ISER Discussion Paper No. 743

47 Pages Posted: 29 Jun 2009 Last revised: 7 Aug 2010

See all articles by Kenju Akai

Kenju Akai

Osaka University - Institute of Social and Economic Research

Tatsuyoshi Saijo

Osaka University - Institute of Social and Economic Research (ISER)

Shigehiro Serizawa

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: July 16, 2010

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

Suggested Citation

Akai, Kenju and Saijo, Tatsuyoshi and Serizawa, Shigehiro, An Experimental Study of Procurement Auctions with Endogenous Minimum Prices (July 16, 2010). ISER Discussion Paper No. 743, Available at SSRN: https://ssrn.com/abstract=1417788 or http://dx.doi.org/10.2139/ssrn.1417788

Kenju Akai (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan
06-6879-8552 (Phone)
06-6879-8584 (Fax)

Tatsuyoshi Saijo

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan
81-(0)6 6879-8571 (Phone)
81-(0)6 6878-2766 (Fax)

HOME PAGE: http://www.iser.osaka-u.ac.jp/~saijo/index-e.html

Shigehiro Serizawa

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan
+81 6 6879 8558 (Phone)
+81 6 6878 2766 (Fax)

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