Article

Review of Industrial Organization

, Volume 35, Issue 1, pp 73-93

Entry and Bidding in Common and Private Value Auctions with an Unknown Number of Rivals

  • Dakshina G. De SilvaAffiliated withDepartment of Economics and Geography, Texas Tech University Email author 
  • , Thomas D. JeitschkoAffiliated withDepartment of Economics, Michigan State University
  • , Georgia KosmopoulouAffiliated withDepartment of Economics, University of Oklahoma

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Abstract

In many procurement auctions bidders do not know how many rivals they face at the time that they incur the cost of preparing their bids. We show in a theoretical model that regardless of whether the procurement is characterized by private or by common values an increase in the potential number of bidders may lead to higher procurement costs. This raises potential policy questions of whether and how entry should be encouraged or limited in public procurement auctions. We use evidence from auctions of construction contracts to estimate the effect of an increase in the pool of potential bidders on entry and auction prices when entry and bidding decisions are made sequentially with no knowledge of the number or identity of the actual competitors.

Keywords

Bid preparation costs Common values Endogenous entry Private values Procurement auctions

JEL Classification

H4 H57 D44