Balanced Unit Prices, the Case for Split Award Unit-Price Auctions

Abstract

Many organizations use procurement tenders to buy large amounts of goods and services. Especially in the public sector the use of these reverse auctions has grown rapidly over the past decades. For the (reverse) unit price auction experience as well as theory has shown that they can attract skewed/unbalanced bids, i.e. bids where the price structure is distorted to take advantage of estimation errors. This paper shows that if the unit-price auction is used to select several preferred suppliers, rather than a single winner, the incentive to skew is reduced, and sometimes even removed. When a part of the contract has to be served the bid-taker can take the prices from the tender and assign this to the cheapest of the preferred suppliers. This punishes bidders for unbalancing by assigning them more of the products they underpriced.

Keywords: Unit Price Auctions, Scale Auction, Reverse Auction, Procurement, Skewed Bids, Unbalanced Bidding, Post Tender Competition, Split Award

JEL Classification: D44, L38, D23, D82