Local Cost Synergies in Reverse Auctions: An Application to Road Salt Procurement
33 Pages Posted: 13 Aug 2019 Last revised: 25 Jan 2021
Date Written: August 9, 2019
We develop a structural econometric model of simultaneous first-price auctions with linkages across items and apply it to Minnesota’s Department of Transportation (MnDOT) road salt procurement auctions. MnDOT holds such auctions annually to procure road salt for each of its depots (storage facilities) located throughout the state. We identify substantial local cost synergies: large firms’ bids reflect a strong preference for winning co-located depots. Counterfactual simulations indicate that, on average, large firms’ bids are about 9 percent lower than they would have been absent local cost synergies, which is advantageous for the state. However, local cost synergies also substantially reduce the competitiveness of small firms—for which we do not detect local cost synergies—which may be disadvantageous for the state. To restore small firms’ competitiveness to what it would have been absent large firms’ local cost synergies, we estimate that MnDOT would have to effectively discount small firms’ bids by at least 12 percent.
Keywords: reverse auction, structural estimation
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