Local Cost Synergies in Reverse Auctions: An Application to Road Salt Procurement

33 Pages Posted: 13 Aug 2019 Last revised: 25 Jan 2021

See all articles by Diwakar Gupta

Diwakar Gupta

McCombs School of Business

Matthew Schmitt

University of California, Los Angeles (UCLA) - Anderson School of Management

Ioannis Stamatopoulos

The University of Texas at Austin - McCombs School of Business

Date Written: August 9, 2019

Abstract

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

Suggested Citation

Gupta, Diwakar and Schmitt, Matthew and Stamatopoulos, Ioannis, Local Cost Synergies in Reverse Auctions: An Application to Road Salt Procurement (August 9, 2019). Available at SSRN: https://ssrn.com/abstract=3435185 or http://dx.doi.org/10.2139/ssrn.3435185

Diwakar Gupta

McCombs School of Business ( email )

Austin, TX 78712
United States

Matthew Schmitt

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Ioannis Stamatopoulos (Contact Author)

The University of Texas at Austin - McCombs School of Business ( email )

2110 Speedway B6000
Austin, TX 78705
United States

HOME PAGE: http://https://sites.utexas.edu/yannis-stamos/

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