James J. Anton, Sandro Brusco and Giuseppe Lopomo
Games and Economic Behavior Vol 69(1): 24-41, May 2010
Abstract:
In a number of observed procurements,
the buyer has employed an auction format that allows for a split-award outcome.
We focus on settings where the range of uncertainty
regarding scale economies is large and, depending on cost
realizations, the efficient allocations
include splitaward outcomes as well as sole-source outcomes (one active supplier).
We examine the
price performance and efficiency properties of split-award auctions
under asymmetric
information. In equilibrium, both award outcomes can occur: the
split-award outcome occurs only when it
minimizes total costs; sole-source outcomes ,however,
occur toooften from an efficiency viewpoint. With respect
to prices, equilibrium bids
involve pooling at a common price for the split award, and separation for sole-source
awards. The
pooling region reduces bidding pressure and allows for relatively high sole-source prices. We provide
conditions under which the buyer and suppliers all benefit from a split-award format relative
to a winner-take-all unit
auction format. We assess the predictions of the model and an extension with data on submitted `step-ladder' bid
prices for a US defense split-award procurement.
JEL Codes: C72, D44, D82, L13