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

33 Pages Posted: 13 Aug 2019 Last revised: 31 May 2022

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 cross-auction linkages, and apply it to Minnesota Department of Transportation's (MnDOT) annual road salt procurement auctions. We begin by demonstrating that North American and Cargill, the two largest firms in MnDOT's auctions, enjoy substantial local cost synergies. Specifically, their bids are about 9 percent lower than what they would be absent these synergies. Then, we examine local cost synergies' interaction with auction competitiveness and efficiency. We estimate that: (i) in a representative sample of auctions, (a) the small firms' probability of winning is about half what it would be absent large firms' local cost synergies, and (b) the simultaneous auction assigns all depots in an area to a single large firm about one-quarter as often as the efficient auction would; (ii) to alleviate the large firm--small firm asymmetry generated by local cost synergies, MnDOT would have to institute a small-firm bid preference of at least 12 percent; (iii) on average, North American's and Cargill's per-ton bids are 0.5 percent and 6.4 percent lower than they would be if MnDOT bundled depots (storage facilities) by area to increase efficiency, respectively. Overall, we find that cross-auction linkages can be economically significant in simultaneous auctions, and that they can substantially moderate the tradeoff between auction competitiveness and auction efficiency.

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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