1. Firm Participation and Competition in
Public Procurement
Jani Saastamoinen*
6th International Public Procurement Conference, 14th – 16th August 2014, Dublin, Ireland
*University of Eastern Finland
3. 27.8.2014Saastamoinen 3
1) BACKGROUND
– Contracting authority (CA) mandated to exploit competitive
environment in the markets when carrying out public procurement
• Efficient allocation of resources
• Attracting bidders crucial to obtain the efficient outcome
– Winner’s Curse
• Aggressive bidding leads to negative or lower than expected profit for the
winning bidder
• Less likely in competitive markets (Wilson 1977; Thaler 1992)
4. • Contract options may influence the level of competition in a tender request
– Open vs. restricted tendering
– Competitive dialogue
– Electronic auctions
– Dynamic procurement
– Aggregated vs. lots
– Contract size
– Framework agreements
– Pure price competition vs. Economically most advategeous tender (EMAT)
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5. • Usually public prorcurement is carried out by first-price sealed bid
common value reverse auctions
• In theory, the winning bid corresponds to the true value of the
auctioned object (Wilson 1977)
• Competition intensifies with the number of bidders (Milgrom and
Weber 1982)
• Biased estimation may lead to the Winner’s Curse (Milgrom 1989)
• Potential consequences for procurer: higher costs, lower quality, order
delays, legal expenses, externalities of business failure (Bilginsoy 2000)
• Attempts to avoid the Winner’s curse may lead to cautious bidding
resulting in a higher costs (Hong and Shum 2002)
• Empirically studied with bid dispersion which measures the
difference between the winning bid and the second highest bid
• Substantial bid dispersion may be an indicator of the Winner’s Curse
(Dyer and Kagel 1996)
• Bid dispersion decreases with the number of bidders (Dougherty and
Lorenz 1976; Saidi and Marsden 1993; Dyer and Kagel 1996; Bilginsoy
2000)
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6. 2) MOTIVATION AND RESEARCH PROBLEM
•Reseach is scarce on the impact of contracting options on the
number of bidders and competition
•Provides a wider perspective to competition in public procurement
•Research questions:
– How different contracting options affect the number of bidders?
– How the number of bidders impacts competition?
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7. 3) DATA AND METHODS
•Regional CA from Eastern Finland
– Annual purchasing volume € 150 million
– e-procurement only
•363 procurement contracts (including lots) awarded in 2011
•Contract values usually above the national or the EU threshold
•Statistical analysis carried out with OLS, logit and tobit regressions
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8. 4) RESULTS
Descriptive statistics (categorical variables)
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Variable Frequency Relative Frequency (%)
Contract value above the EU threshold (eu_d) 126
[156]
47.4
[43.0]
Contract value above the national threshold (nat_d) 102
[153]
38.3
[42.1]
Lots contract (lots_d) 200
[278]
75.2
[76.6]
Service contract (serv_d) 106
[127]
39.8
[35.0]
Supplies contract (sup_d) 158
[231]
59.4
[63.6]
Restrictive tendering (res_d) 40
[53]
15.0
[14.6]
Framework agreement (frame_d) 172
[221]
64.7
[60.9]
Single bid tender (onebid_d) -
[96]
-
[26.4]
Contract awarded to multiple bidders (multi_d) 144
[183]
54.1
[50.4]
Notes: Figures in parentheses include the tender calls where only a single bid was submitted.
9. Descriptive statistics (continuous variables)
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Mean Median Standard
Deviation
Minimum Maximum Number of
Observations
n 4.30
[3.42]
3
[2]
4.13
[3.82]
2
[1]
42
[42]
266
[363]
N 21.24
[18.61]
12
[12]
30.59
[26.92]
2
[1]
175
[175]
266
[363]
B2 – B1 7170.67 332.73 35208.60 0 457450 266
ln(B2 – B1 + 1) 5.65 5.81 2.98 0 13.03 266
(B2 – B1)/B1 .43 .13 2.10 0 32.9 266
ln(B2) – ln(B1) .23 .13 .34 0 3.52 266
CV .24 .19 .23 0 1.61 266
Sd. 9697.77 611.59 40604.73 0 517791.2 266
B 68353.04
[52561.33]
5225.41
[3546.87]
421979.60
[351557.1]
.93
[.71]
6320431
[6062820]
266
[363]
p 80.47
[81.76]
90
[90]
22.98
[23.06]
40
[40]
100
[100]
225
[284]
Notes: The figure in parentheses includes also the tenders where only a single bid was received.
n: Number of bidders.
N: Number of interested bidders.
B2 – B1: The difference between the two lowest bids.
ln(B2 – B1+1): A logarithmic transformation of the difference between the two lowest bids.
(B2 – B1)/B1: A relative difference of the difference between the two lowest bids.
ln(B2)-ln(B1): A logarithmic transformation of the relative difference between the two lowest bids.
B : The average bid size (Euro).
p: The proportion of price in percentage points [0, 100] in the applied EMAT criterion.
15. Summary of results
•Single bidder tenders
– A single bid is more likely in supplies and lots contracts
– When a contract is awarded to multiple suppliers and there is more
general interest toward a request for tenders, receiving only one bid is
less likely
•Tenders with several bidders
– Supplies and lots contracts attract less bidders
– Contracts awarded to multiple suppliers, larger contracts by value,
and a general interest toward a request for tenders attact more bidders
•Competition
– Bid dispersion decreases when the number of bidders increases
• Intensifies competition
• Winner’s Curse less likely
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16. 5) CONCLUSION AND IMPLICATIONS
•This study showed that the choice of contracting options affects the
number of bidders a request for tenders attracts
•In turn, the number of bidders is positively connected with the
level of competition and potential Winner’s Curse in public
procurement
•Interest toward a request for tenders translates into a higher
number of submitted bids
– CAs should advertise upcoming invitations to tender could increase
the number of received bids
•CAs should consider using multi-supplier contracts to instigate
competition
•CAs should carefully consider when a contract should be divided
in lots and an aggregated contract should be preferred in light of
economic benefits arising from competition
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