Dynamic Oligopoly in Procurement Auction Markets

Abstract

This study develops a model of dynamic oligopoly competition in large procurement auction markets and applies this to Texas Department of Transportation (TxDOT) highway construction and maintenance contracts. Forward-looking firms enter, exit, grow, and gain experience while competing in a sequence of low-price, sealed-bid auctions. Firms play a Moment-based Markovian Equilibrium (MME) similar in spirit to Ifrach and Weintraub (2017), rendering analysis tractable even in markets with hundreds of firms. Structural estimates based on TxDOT data from 2000-2012 highlight the significant role of dynamic factors like firm experience in shaping market outcomes. The research intends to evaluate the impact of procurement mechanism design, including reserve price policies and eligibility requirements, through counterfactual analysis of long-run industry responses to alternative mechanisms.

Keywords: Auctions, Dynamic Games, Oligopoly, Market Design

JEL Classification: D43, D44, D47