This page intentionally left blank Handbook of Procurement How can organizations ensure that they can get best value for money in their procurement decisions? How can they stimulate innovations from their dedicated suppliers? With contributions from a number of leading academics and professionals, this handbook offers expert guidance on the fundamental aspects of successful procurement design and management in firms, public administrations, and international institutions The issues addressed include the management of dynamic procurement; the handling of procurement risk; the architecture of purchasing systems; the structure of incentives in procurement contracts; methods to increase suppliers’ participation in procurement contests and e-procurement platforms; how to minimize the risk of collusion among sellers and of corruption of procurers’ agents; pricing and reputation mechanisms in e-procurement platforms; and how procurement can enhance innovation Inspired by frontier research, it provides practical recommendations to managers, engineers and lawyers engaged in private and public procurement design It will also be a key reference text for MBA courses related to procurement design and supply chain management Nicola Dimitri is Professor of Economics at the University of Siena and Senior Consultant at Consip SpA Gustavo Piga is Professor of Economics, University of Rome Tor Vergata, and OECD-Sigma Procurement Expert Giancarlo Spagnolo is Head of Research at Consip SpA and Associate Professor of Economics at the Stockholm School of Economics Handbook of Procurement EDITED BY NICOLA DIMITRI, GUSTAVO PIGA AND GIANCARLO SPAGNOLO cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge cb2 2ru, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521870733 © Cambridge University Press 2006 This publication is in copyright Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published in print format 2006 isbn-13 isbn-10 978-0-511-24969-3 eBook (EBL) 0-511-24969-1 eBook (EBL) isbn-13 isbn-10 978-0-521-87073-3 hardback 0-521-87073-9 hardback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate Contents List of figures viii List of tables ix List of contributors x Preface Part I Part II Part III Preliminary Issues Introduction Nicola Dimitri, Gustavo Piga and Giancarlo Spagnolo The variety of procurement practice: evidence from public procurement Laura Carpineti, Gustavo Piga and Matteo Zanza 14 General Strategic Principles When should procurement be centralized? Nicola Dimitri, Federico Dini and Gustavo Piga 47 Procurement contracting strategies Gian Luigi Albano, Giacomo Calzolari, Federico Dini, Elisabetta Iossa and Giancarlo Spagnolo 82 Incentives and award procedures: competitive tendering vs negotiations in procurement Patrick Bajari and Steve Tadelis 121 Competitive Tendering Strategies V xiii Information and competitive tendering Gian Luigi Albano, Nicola Dimitri, Riccardo Pacini and Giancarlo Spagnolo 143 vi Contents Division into lots and competition in procurement Veronika Grimm, Riccardo Pacini, Giancarlo Spagnolo and Matteo Zanza Multi-contract tendering procedures and package bidding in procurement Nicola Dimitri, Riccardo Pacini, Marco Pagnozzi and Giancarlo Spagnolo Part IV Dynamic auctions in procurement Lawrence M Ausubel and Peter Cramton 193 220 Attracting and Screening Participants 10 Pricing and other business strategies for e-procurement platforms Bruno Jullien Part V 168 249 11 Fostering participation Gian Luigi Albano, Nicola Dimitri, Isabelle Perrigne and Gustavo Piga 267 12 Scoring rules Federico Dini, Riccardo Pacini and Tommaso Valletti 293 13 Managing risky bids Andreas Engel, Juan-Jose´ Ganuza, Esther Hauk and Achim Wambach 322 Preventing Collusion and Corruption 14 Preventing collusion in procurement Gian Luigi Albano, Paolo Buccirossi, Giancarlo Spagnolo and Matteo Zanza 15 Bidding rings and the design of anti-collusive measures for auctions and procurements William E Kovacic, Robert C Marshall, Leslie M Marx and Matthew E Raiff 16 Corruption in procurement auctions Yvan Lengwiler and Elmar Wolfstetter 347 381 412 vii Part VI Contents Dynamic Forces and Innovation 17 Managing dynamic procurements Tracy R Lewis and Huseyin Yildirim 433 18 Designing reputation mechanisms Chrysanthos Dellarocas, Federico Dini and Giancarlo Spagnolo 446 19 Procuring innovations Luis Cabral, Guido Cozzi, Vincenzo Denicolo`, Giancarlo Spagnolo and Matteo Zanza 483 Glossary Index 530 534 Figures 2.1 2.2 2.3 2.4 2.5 Purchased value as a percentage of total public procurement, 2003 Participation requirements Number of participation requirements requested Main reasons to split a contract into lots Information disclosed after the awarding of the contract 9.1 9.2 Individual supply bid, round Aggregate supply curve 231 231 Linear scoring rule: the role of the price threshold Parabolic scoring Uniform distribution Concentrated distribution on high prices and ALT 306 308 312 314 12.1 12.2 12.3 12.4 VIII 17 18 19 24 28 Glossary abnormally low bid/tender – In sealed-bid tendering or dynamic auctions, a particularly low price submitted to win a competition Normally a tender is defined as abnormal when it is below, by a certain predefined percentage, the average of all prices bid by suppliers Such very low tenders could be made by a very efficient supplier, by bidders who wrongly underestimated the uncertain cost of serving a contract, or by potentially insolvent suppliers who strategically chose to so In public procurement, bidders who submitted an abnormally low tender are asked to explain their offers by the buyer who, based on these justifications, could either accept or reject the offer activity rule – In dynamic auctions, a rule defining how participants have to bid in order to be allowed to remain in the auction asymmetric firms – In competitive procurement firms are considered asymmetric if they have a significantly different cost structure for performing a contract, and/or if they not have access to qualitatively similar sources of information about a supply contract Other possible sources of asymmetry could be the revenue or the number of employees auction – See dynamic auction awarding procedure – The procedure adopted by the procurer to assign a contract; in procurement, the two main awarding procedures are negotiations and competitive tendering bid – Offer made by a supplier in sealed-bid tendering or a dynamic auction The proposal can consist of an economic as well as a technical component bidding consortium – A group of suppliers submitting a single bid bidding ring – A group of suppliers who illegally coordinate their bidding strategies in order to soften price competition, and bid prices higher than they would as compared to effective competition bundling – The practice of combining two or more contracts into a large single supply contract collusion – Explicit or tacit agreement among a group of suppliers aiming at softening price– quality competition, thus reproducing the behaviour of a single dominant firm collusive cartel – See bidding ring combinational competitive tendering – See combinatorial competitive tendering combinatorial competitive tendering – A multi-contract bidding competition where suppliers can submit prices for single contracts as well as for packages of contracts 530 531 Glossary competitive tendering – Competition where suppliers submit tenders to be awarded the contracts being procured complementarities – For a supplier a group of contracts exhibit positive (negative) complementarities if the cost of serving all of them is lower (higher) than the sum of the costs of serving each single contract contract – See supply contract contractor – The supplier who is awarded a contract corruption – Illegal, wealth-seeking behaviour of the procurer when buying on behalf of a third party such as a public authority or a firm descending auction – See reverse auction dynamic auction – Bidding competition where participants can observe rivals’ offers while the competition is running dutch auction – Used to sell quickly perishable goods, such as flowers and fish, and virtually absent in procurement As adjusted to procurement it is a dynamic auction format whereby the procurer starts calling a very low price for a contract, which he raises until a supplier stops the increase The bidder who does so is awarded the contract and paid the price he has bid Dutch auctions can last very little time, which makes it possible to run a sequence of them in a limited amount of time e-auctions – Auctions which are conducted on-line economies of scale – The characteristic of a production process whereby the unitary cost of a product decreases as production increases e-platforms – Web portals working as mediators in two-sided markets e-procurement – Procurement activity conducted on-line externality – Any effect of a consumption or production decision on people not involved in the act free riding – Free riding occurs when one firm (or individual) benefits from the actions and efforts of another without paying for, or sharing, the costs heterogeneous bidders – See asymmetric firms incumbent – The actual contractor joint bidding – A bid made by a group of suppliers acting as a single participant in a competitive tendering letter of credit – A financial instrument, typically issued by a bank, working as a cash guarantee to the owner The issuer is secured by the supplier’s financial assets lot – A supply contract that is being procured lowest-price auction – A dynamic, reversed auction where the supplier offering the minimum price gets the contract and is paid his bid by the procurer It is the English auction, used in sales, adjusted to procurement One of the main features of the lowest-price auction is its end rule lowest-price sealed-bid tendering – A competitive tendering procedure where bidders compete for a supply contract by submitting a price in a sealed envelope to the procurer The procurer opens the envelopes publicly and assigns the contract to the supplier who offered the lowest price The contractor receives a payment equal to his bid This is analogous to the 532 Glossary first (highest)-price sealed-bid tendering used in sales Sealed-bid tendering can also be conducted on-line most advantageous offer – The best price–quality combination received by the procurer In competitive tendering procedures, the most advantageous offer is typically selected through a scoring rule multi-contract competitive tendering – Procurement competitive bidding where more than one contract is procured in the same sealed-bid tendering or dynamic action multiple-lot auctions – See multi-contract auctions multi-round auctions – A dynamic descending auction where each round comprises a sealed-bid session; after every round, and before the next one, the buyer publicly announces the offers received Typically, at each stage the highest acceptable (reserve) price decreases negotiation – A procedure to award a contract whereby the procurer, to obtain the best conditions, entertains individual interactions with potential suppliers open procedures – Bidding competitions where all interested suppliers, provided they satisfy some preliminary requisites, can submit tenders package bidding – A competitive bidding mechanism in which suppliers can make offers on sets of contracts as well as on single ones procurement contract – See supply contract reserve price – In competitive tendering procedures, the maximum price acceptable by the procurer restricted procedures – Bidding competitions where the buyer selects the group of qualified potential suppliers that can submit a tender reverse auction – A dynamic auction where suppliers bid for a contract, which is awarded to the bidder who submitted the lowest price ring – See bidding ring scoring rule – A mathematical formula assigning a number (score) to the price and the other components of a multi-dimensional tender submitted by a supplier Through a scoring rule the contract will be awarded to the supplier who obtained the highest score second-lowest-price sealed-bid tendering – The second price Vickrey auction, used in sales, adjusted to procurement A competitive tendering procedure where bidders compete for a supply contract by submitting a price in a sealed envelope to the procurer The procurer opens the envelopes publicly and assigns the contract to the suppliers who offered the lowest price Unlike what happens in a lowest price sealed-bid tendering, the price that the buyer pays to the contractor is the second lowest price received by the procurer In this format, when the cost of serving the contract is not uncertain for a supplier, submitting the minimum price a bidder is willing to be paid can be preferable to any other price that he could offer The sealed-bid procedure could be conducted on-line sequential competitive tendering – A sequence of single-contract bidding competitions used to procure a certain number of contracts simultaneous competitive tendering – A multi-contract competitive tendering in which suppliers compete for a group of contracts which are procured simultaneously 533 Glossary subcontracting – Agreement between a contractor (prime contractor) and another supplier (subcontractor) to share the supply contract, in which the prime contractor keeps responsibility for the completion of the contract supply contract – A contract that formalizes the relationship between buyer and supplier, specifying the conditions of the supply Normally, a contract fixes a time horizon of validity and a precise quantity, or alternatively a maximum–minimum amount to be provided for the products being procured The price for serving the contract can either be specified in the contract itself or determined as the outcome of a competitive tendering surety bond – A surety bond is a three-party instrument between a surety, the contractor, and the project owner The agreement binds the contractor to comply with the terms and conditions of a contract If the contractor is unable to successfully perform the contract, the surety assumes the contractor’s responsibilities and ensures that the project is completed switching costs – Costs borne by the procurer when it changes the contractor tender – A supplier’s offer, which can comprise a price as well as a technical proposal truncated English auction – As adjusted to procurement, a two-stage auction format in which the suppliers offering the k > lowest prices are selected in the first stage Among them, in the second stage, the procurer chooses the winning firm(s) Vickrey auction – A competitive mechanism used in sales in which the winning supplier does not pay his bid, the highest price, but the second highest bid winner’s curse – The phenomenon occurring when the winner of a contract submits too low a price having underestimated the uncertain cost of supply Index 2004 Assessment of Excellence in Procurement, by A T Kearney,48 2004 EU Directive, streamlining/harmonizing procurement processes 5, 16 2005 Worldwide Survey on corruption entitled ‘‘Resisting Corruption in the Public sector’’59 abnormally low tenders (ALTs) 34–6, 311 bankruptcy 340 identifying 337 particular concern in procurement 315 price threshold 307, 316, 305 strategies 326, 338 suppliers 334 accountability 52 affiliated information 166, 154 form of statistical correlation 154 Afghanistan Reconstruction and Development Services (ARDS) 67 agency 508 aggregate supply curve 231 aggressive bidding 404 Aghion, P 61 agreement 488 Albano, G L 371 Amazon 448 American Federal Acquisition Regulation 19 American GSA (General Service Administration) 49 Anderlini, L 86 Andersson, B 62 Anglo-Dutch 161 dynamic (ascending) phase of the auction 271 sealed-bid phase 289 anonymity 447 antimalaria drugs 77 antitrust 389 authorities 38, 368 variable cost 263 Anton, J J 108, 188, 443 Armstrong, M 171, 265 Arozamena, L 427 Arvis, J.-F 427 534 Asker, J 272, 320 asymmetric\heterogeneous participants 504 asymmetries 494 auction design 137 bidding rings 398–406 dynamic (descending-bid) auctions 220 frequency 405 multi-round descending auctions 42, 160 on-line descending auctions 21 participation 404 procurement set-ups 48 price structure 252 average bid method 339 average bid wins 338 Avery, C 156, 171, 480 awarding constraint 462 criteria 284 limits 284 mechanism 122 procedures 125 rules 524 Ayres, I 288 Bajari, P 126, 135, 137, 479 Baker, G 128 Bakos, Y 261, 265 balancing tariffs 253 Banfeld, E C 103 bankruptcy (risk) 524 bargaining power 53, 70–3 licensing agreement 490 purchasing positions of buyers 71 Bartholomew, S H 123 Bernheim, D B 56, 217 BESCHA (Germany) 27 Bezos, J., 251 bid decrements 229 orchestration 413 withdrawals 474 rotation scheme 393 bidders’ identity 456 535 Index bidding consortia 115 fees 349 bidding credits 288 competitive tendering with premium 291 identifying bidders 287 in multi-contract tendering processes 288 preferences to firms controlled by women and minorities 288 bidding rings 381, 389 bid rigging by ‘‘standard’’ cartels 397 cartel formation in oligopolistic markets 79 for collusion 396, 399, 403 complementary bids or cover or courtesy bids 394 discourage bidders by the threat of severe sanctions 367 first-price sealed bidding 391, 393, 396, 404 non-cooperation 400 secret price cutting behavior 398 Sherman Act violations for bid rigging [US] 383 single ring organizing 395 Binmore, K 169 Board on Global Health (BGH) 52 Board, S 341 Bolton, P 79, 67, 118, 83 Branscomb, L 527 Brazilian Department of Logistic and General Services (The Brazilian Federal Government) 41 bribe 473 Brickley J 65, 51 Brynjolfsson, E 261, 265 Bulfin, R 217 bundling and exclusivity rules 168 bundling goods 260 bundling services 513 bundling of services 171, 173 Ariba (www.ariba.com) 261 bundling the lots 173, 174, 261 price-discrimination, using various combinations 261 scope for collusive behaviour 179 Burguet, R 320, 427 business cycle 330 strategy 125 button auction 162 buyer Cabral, L 443, 479 Caillaud, B 264 Calandruccio, R 267 Calveras, A 320, 341 Calzolari, G 118, 114, 341 Campbell, W 166, 149 Cantillon, E 272, 320 capacity constraint 330 Capen E 166, 149 cartels 11, 384, 386 incentive schemes 388 frequency of 384 ceiling to subcontract 33 Celentani, M 79 centralized procurement of antimalaria drugs 77–8 BBG (Austria) 49, 27 CONSIP, central Italian Agency for Procurement of Goods and Services 6, 24, 27, 29, 49, 65, 476–9 My Florida Marketplace [American GSA] 50 OGC Buying Solutions (U.K.) 49 Opache (France) 49 Satskontoret (Sweden) 49 SKI (Denmark) 49 centralization 16, 48, 52, 73 center-led procurement model 48 component wise [GM] 62 dumping strategies 57 and e-procurement 74–6 franchising 62 incentives to improve communication 59 for international organizations 52, 61 knowledge-information sharing 56 product standardization 60 of public procurement 16, 49, 281 reducing costs 55 specialization 55 of strategic products and activities in the private sector 61–2 centralization/decentralization 47, 48, 53–4, 76 emergencies 53, 66–8 firms 47, 51 monitoring contractors’ performance 53, 73–4 centralized procurement 60, 65 centralized systems of large bundled contracts 513 monopsonization 7–8 NCE-Procurement @Your Service, North Carolina 50 network industries 64 political costs 60 systemic market vision 66 UNICEF centralized procurement for childhood vaccines 52 Chakraborty, I 173 Chakravarty, S 137 Chang, H L 79, 82 Chao, H 320 Citysearch 462 Clapp, R 166, 149 client 417 clock auction 235, 237 discrete rounds 222, 229 implementation of a simultaneous clock auction 9, 232 simultaneous descending auction 222 clock proxy auction 9, 223, 237–9 closing rules 362 Clough, R 123, 131 536 Index code bidding 361 collusion 6, 11, 181, 406, 388 anti competitive bidding rings 11 benchmarking 408 cartels 384 competitiveness of market 175, 282 deterrence measures 84, 406 in a dynamic auction 158, 362, 388 examples of suspected bidding behavior 368–78 gain by reneging on the collusive agreement 349 implicit collusion 181, 183 important increase competition 72 impossible to be sustained 352, 354 information circulation and 158 limits the sustainability of 351 mechanism used by the bidding ring 390, 392 mechanisms to prevent 37–8 number of lots and coordination 181, 182 in oligopoly 350 overcome coordination problems 182, 387, 388 ownership of complementary assets, 351 phoney bids 348, 358 pre-auction mechanism 393 price discovery 362 in procurement 356 prosecution under the antitrust laws of the United States 384–5, 387, 391–2, 394–6 response to the competitive procedures 181, 183, 214, 349, 390, 412 risk of collusion among bidders 27 role of procurements in collusion 383–9 scope for collusive agreements 170 sequential competitive tendering can facilitate collusion 360, 383–9 sustained by multi-market sharing agreements 169, 184, 348, 349 tactics for mitigating collusion involve the use of market power 407 uncertainty about the common component, 157 unilateral and coordinated demand reduction 212 collusive agreements 11, 303 unprofitable for other bidders 213 collusion in procurement 356 admission of a bidding consortium 366 after uncovering a cartel 367 awarding rules 363 bid withdrawals 362 closing rules 362 code bidding 361 competition indexes 351 concerted practices 348 deterring bid-rigging 368 fixed number of participants in growing markets 353 horizontal differentiation 357 Italian Competition Authority (ICA) 348 jump bidding 361 lowest price vs second-lowest price 359 market transparency facilitates collusion 352 Office of Fair Trading (UK) 348 opaque disclosure policy 352 product differentiation 356 vertical differentiation 356 collusive schemes 406 collusive strategy 362 combinatorial bid 217 combinatorial clock auction 238 combinatorial tendering process 20, 42, 201 the number of offers 204 common pricing policy 365 common production costs 98 common uncertainty 144 common value 328 communication costs 52 competition in procurement 168 competition ratios 175–9, 183 competitive bidding-augmented research contests 503, 504 competitive bidding procedures competitive determinant 13 competitive tendering 56, 159 awarding constraints 36 bidders’ learning process 156 capped price contract (CPC) 88 combinatorial bid 217 common value auctions 166 cost-plus structure 129 English (reverse) auctions 163 estimating the contract cost 144 fair market price discovery 122 fixed-price contract (FPC) is a contractual agreement 90 formats and participation 6, 9, 39, 58–62 inhibiting successful coordination 382 lottery, a fair allocation process 329 lower participation, weak commitment in the reserve price 283 most commonly observed collusive mechanism 282 performing contractor, important way to reward or punish 112, 144 problem of ex-ante opportunism 133 reserve price, set at a larger value 280 reverse auctions 122 simultaneous descending auction 240 two-stage tendering process 20 underbidding and overbidding 150–4 competitive tendering design 9, 10, 39, 42, 209 competitive tendering format\process 327 competitive tendering procedures 7–8, 12 different acquisition processes in different countries 75 different approaches to interaction 38 general strategic principles 6–7 competitors, number of 512 complementarities 174, 177, 194 complexity 520 Compte, O 427 537 Index conflict of interest 103, 114 shortening contract duration 113 conservation factor 436 consortium 92 contract cost plus 123, 129 cost reimbursement, 87 incentive 446 length 112 linear 93 contestability 110 contractible quality 317 contracting strategies 386 explicit 83 contracts 5, attitude toward risk 84 awarding procedure 7, 28 bidders contract penalties 315 contractual components: design and incentives 125, 127–8 contractual incompleteness 125, 127, 128 cost plus contract, effects of 129 cost savings from large production 113 duration 31 fixed price contract, effects of 129 flexibility, 83 future contractual relationship and past performance 111 obligations 82 possible discrepancies between estimated and actual production costs 5, 144 post-contractual methods 111 PPD (Cyprus) formula 29 procurement contract 124 single awarding or multiple awarding 30 specific-performance contract that binds the supplier to the original plans 129 subcontracting, ceiling to 33–4 tryout period should be chosen carefully 114 Unit price contracts (UPCs) 88 unwillingness to offer aggressively on a single contract 196 coordination, 509 Corbett, B 61 corruption 6, 12, 103, 164, 232 benefits of long-term relationships 263 different forms observed in procurement 413 ICGFM survey 59 corruption in auctions 412–13, 422, 424, 427 ‘‘AB Bidding’’ 419, 424 alternative aggregation method 421 bid orchestration 416–26 bidding behavior 415 comparing externalities generated and lower prices 255 conflicts of interest 103 corrupt practice, The World Bank 412, 427 first-price auction 415 quality-and-cost-based selection (QCBS) 418, 423 rewards for ‘‘whistleblowing’’ 427 second-price auction, corrupt coalition in 415 trimmed mean 421 U.S Foreign Corrupt Practices Act (FCPA) 425 Corts, K 137 cost bidders’ psychological costs, 158 control 53, 54–7 estimation 524 expected cost 490 function 145 production cost 484 common component 280 private component 269 specialized person 274 true cost 414 cost-plus contracts 124 ‘‘low powered’’ incentives 124 cost-reduction 94, 145 in finding an alternative supply channel 106 role of incentives for 85–7 suppliers’ efficiency, 99 cost-reimbursement contracts (CRCs) 87–8 distinguishing feature of 87 drawback 89 important role in the procurement market 89 suitable where quality is non-verifiable 89 cost-sharing, 94 countervailing buying power 72 Cramton, P 242, 288 cross-subsidies 253 cryptography 456 customer satisfaction 456 Dalen, D M 118 Darr, E 443 Dasgupta, S 319 deadweight losses, 489 decentralization 6, 47, 51, 59 decentralized procurement, 48 decision information costs 53, 68–70 Dellarocas, C 264, 479 delay 510 delegation 48 demand fluctuations 364 Department of Defence 484 descending clock auction 162, 163, 164 descending proxy auction 238 Dessein, W 61 Dewatripoint, M 83, 118 discretion, 493 Dini, F 479 disclosure policies 27, 360 in a competitive auction 235 and feedback mediators 466 important aspect 467 opaque 353 discrete round auctions 229 538 Index discriminatory auctions 257 discriminatory policies 284 diversification, 330 diversification factor 437 dual sourcing, 317 divisible goods 179, 221, 240 division in lots 168 and revenue/efficiency considerations 170 Doni N 114 Donohue, D 342 dual sourcing 110, 443 in public and private procurement agencies 107, 110 reduces economies of scale 110 Dudley, L 443 dues 456 dynamic auctions 8–9, 220 exposure problems 22 first-price sealed bidding 387 makes collusion more likely 155, 358, 387, 392 multiple contracts and ‘‘in-auction’’ collusion 360 price information and the bidder’s decision problem 221 streamlining dynamic auctions 157–9 Survival Auctions 164 two stage sealed-bid tendering 164 vs sealed-bid competitive tendering 358 dynamic format 155–6 dynamic procurement 116, 433–43 conservation of switching costs 434, 436 diversification of supply 434, 436 dynamic reversed auction with package bidding 206 important examples 73 neutral valuation for new comers 113 to promote price competition 437 supply flexibility 234 dynamic tendering format/process 112 eBay, 448 economies of scale 8, 55, 110 efficiency 473 efficiency of bundling, 178 EIM Business and Policy Research (commissioned by the EU Commission) 24 electricity 320 e-Market 456 Ellman, M 108 emergency in Transitional Islamic State of Afghanistan (TISA) 67 emergency procurement 91 end users, 294 Engel, A R 35, 341 English auction 165, 328 enforcement 381 entry costs 271 fees 500 reputation 457 entry barriers 274, 275, 354 informational entry barriers 470 for new operators, lack of a reputation 458 reserve prices 273, 276 e-marketplaces 249–50, 264, 446 e-procurement 53, 250–1 improve procurement performance 23 information broker 251 reduction in participation costs 275 e-procurement platforms 64, 260, 446 access to public e-markets 457, 459 antitrust 262 AOL 260 California Performance Review programme, 50 customer satisfaction and non-measurable aspects of quality 456 disciplining power of the feedback mechanism 470 electronic tendering procedure 22 ex-ante opportunism 448 excluding the lowest bids from the competitive bidding 338, 339 feedback (or reputation) mechanisms 117, 457 large attrition rates 55 price elasticity and externalities 256 the World Bank Group implemented an e-procurement solution for the selection of consultants 23 EU framework agreement, 21 European Directive, 294 externalities, 457 Epstein, R 217 EU Directive 2004/1811, 21, 43 EU Experts Group 528 EU Lab 2005 15, 49 activity 39–40, 43 involving SMEs in public procurement 40 methods to avoid collusion 42 purchasing systems 7, 40–1 questionnaire on competitive tendering 39, 41–2 working group on ‘‘SMEs’’ 39 European Commission 72 European Community 427 Ewerhart C 88 exclusion principle 268, 279 explicit contracts 83, 87–9 exposure problem 197, 200 FAR 43 Farrell, J 67, 79, 187, 191 faster dynamic auctions 162–5 favouritism 53, 57, 136 Federal General Service Administration (GSA) 21 facility management, 69 feedback deadline 107, 496 exchange 459 539 Index irreversible 475 last minute 459 manipulation 464 mechanism 447 mediator 466, 474 missing 459 negative 452 neutral 453 positive 452 provider 458 provision 457 reliability 458 score 453 solicitation 459 truthful 458 withdrawal 471 feedback mechanisms 459, 461, 478 design of 263, 451, 454–75 eBay vs Amazon 448–54 ‘‘ex-ante’’ and ‘‘post-contracting’’ opportunism 446 online anonymity 456 online feedback mechanisms 263, 451 portability 468 pricing and other business strategies 249 qualitative and quantitative feedback 462 retaliation and reciprocation 103–4 value of the transaction 469 fees 500 Felli, L 86 Fieseler, K 88 financial guarantees, 271 Fishman, M J 156 fixed-price contracts 90, 124, 135, examples 143 higher production costs 90 Florida, R 527 fragmentation 277 framework agreement 5, 8, 30, 66 franchisee 62 franchising 61 franchisor 62 free services 252 free-riding 102, 457 frequency of interactions 352, 358, 360 frequency of procurement 442 Friedman, E 479 Fujishima, Y 164 Fumagalli, C 72 Gallini, N 187, 191 Gaudeul, A 265 Gerstner, L 55 Global Creativity Team 62 Google 260 Government Procurement Law (GPL) 50 Graham, D A 409 granularity, 486 green procurement, 454 Greenstein, 63, 527 Grimm, R 78, 174, 191 guarantees, 491 Guerre, E 278 Gurbaxani, V 68 Guriev, S M 108, 118 Hagiu, A 265 Harstad, R 217 Hart, D 527 Hendershott, T 171 hierarchy, 69 Hinze, J 123, 131 Holloway, F 23 Holmstrom, B 128 Hortacsu, A 479 Houghton, S 137 hybrid procurement model 48, 53, 66 Ibbs, C W 128 ICT IFPMM 14 implicit contracts 83, 101, 104, 114 linear scoring 363 participation incentives and heterogeneity of participants 179, 262 incentive contracts (ICs) and tendering procedures 93, 96, 98–9, 126 examples 95 exogenous events 99 explicit incentive contracts 446 incentive scheme 94 incumbent, 512 indivisible goods 222 information asymmetric, 490 circulation, 154 disclosure, 461 manipulation, 464 private, 400 information, role of 402–4 composition of the demand, 144, 148 policy 144, 235 overbidding 154 suppliers intrinsic efficiency 69, 148 in-house made product 439 innovations 492 integrated buyer 435, 440, 442 integration, 517 intellectual property 487, 488–93 Daguerre, 488 Harrison, J and Hyatt, J 488 Kremer patent-buy-out mechanism 494 public expenditure 519 International Consortium on Government Financial Management (ICGFM) 59 International Purchasing and Supply Education and Research Association (IPSERA) 14 Iossa, E 87 IPSERA 14 540 Index Italian Procurement Agency (Consip S.p.A) 114 Ivaldi, M 183, 371 Janseen, M 217 Jehiel, P 171 Johnson, S 53 Jullien, B 265 jump bidding 156 Kagel, J 152, 164, 166, Kelman, S 118 Kerr, S 128 Kim, I G 114 Klein, T 479 Klemow, J 23 Klemperer, P 161, 166, 169, 191, 217, 292, 443 knowledge, a ‘‘public good’’ 486 Koc, S 427 Kpundeh, S J 427 Kranton, R 188 Krishna, V 168, 217, 267, 292 Kvasov, D 108, 118 Laffont, J J 83, 117, 122 Lambert-Mogiliansky, A 427 Lee, T A 427 legal constraints, 447 Legros, P 87 Leipold, K 23 Lengwiler, Y 427 Levin, J 137 Lewis, T 189, 191, 443 limited bidding, 284 limited liablility 10 aggressive bidding 323 risk indifferent (or risk neutral) firms 323, 326 linear incentive contracts 93, 94 linear scoring (Ls) 303–5, 424 local public administration 48 structure 460 units 58 lock-in 185, 187, 351 cause high switching costs for the buyer 186–7 market tipping 189 opportunistic behaviour 186 over recurring procurements 186 penetration price 189 presence of idiosyncratic investments 186 rotating purchases among rival suppliers 189 long run switching costs 435 lots 58, 169 limiting the number of 36 lots division 26, 168, 172, 178 affects the incentives of participating firms 170 aggressive bidding and (Pay-as-Bid) package tendering 208 number of incumbents 181 participation 276 reduction to avoid collusion 183–4 specialized small firms 180 uncertainty reduced 157 lowest price tendering format/process 359 Lyon, T 108, 110, 188 make-or-buy decision, 135 MacLeod, W B 137 Mailath, G 409, 479 managing dynamic procurements 436, 442 English and Dutch tendering procedures 443 integrated buyer 437 make or buy decision 441 standard theory of oligopoly 440 strategic benefits from switching cost 435, 438, 439 managing risky bids 323, 325, 326, 327 English and the Dutch auction 327 entry fees 331 letters of credit 332, 333, 525 lottery 329 price preference 339 screening 336, 525 second-price sealed-bid (SPSB) 324 surety bond bankruptcy 332, 334–5 third-party guarantees 332 under limited liability matters 326 unintended negative consequences 337 winner’s curse 322, 328 Manelli, A 138 marginal cost pricing 253 market dynamics 53, 65–6 market maker, 456 market power 241 market place 446 market price 485 market-sharing agreements 349 market transparency 352 Marshall, R 371, 409 Marx, L M 409 Maurer, S 528 McAdams D 164 McAfee, R P 89, 99, 138, 223, 409 McCue, C P 48 McMillan, J 83, 113, 138, 409 mechanism design, 463 e-markets 448 immunization 464 one-sided feedback, 460 two-sided feedback 475 Melumad, N D 69 membership fees 250, 257–60 Menezes, F 427 Meurer, M J 409 Meyer, N D 68 Milgrom P 154, 168, 172, 191, 217, 223, 292 Miller, N 480 military procurement, 484 Minehart, D 188 541 Index Moen, E R 118 monetary value of a point (MVP) 296 allocating budget for the contract 298 money for reputation, 471 monitoring, 478 Monteiro, P 427 Moon, M J 3, 22, 43, 75, 79 moral hazard 481 Motta, M 72 multi-contract dynamic auctions 8, 9, 193 multi-market contracts 185, 357 Multiple Award Schedule (MAS) 358 multiperiod procurement 443 multi-round descending auctions, 159–62 fixed-end rule 160 maximum number of rounds rule, 160 tick size, 161 validity rule 161 multi-sourcing 109 cost and risks of multisourcing 189 reducing the risk of bankruptcy by sourcing to more than one contractor 330 trade-off between cost and benefits of 190 Myerson, R B 292, 409 National Audit Office [UK] 112 National Institute of Statistics (ISTAT), Italy 26 natural linkages in goods 232, 233 Neef, D 75, 78 negative complementarities 195, 214 homogeneous supply contracts and tendering on shares 209 menu package bidding 203 per-unit production cost 209 risk of exposure of suppliers 209 supply contracts 207 negotiations 7, 116, 135 in the private sector 122 past performance scores, 114 Neilson, W 427 networks, 485 network effects 53, 508 non-contractible quality (NCQ) 101, 104, 107 contract termination 106 larger margins on contractors’ profits 105 opportunistic behavior 105 procurement discretion 102 selection or pre-contractual methods 101 verifiable 86 non-standardized goods/services 86 on-line supply, 260 open competitive tendering (OCT) 122, 134 opportunity cost 271, 280 opportunistic cost-reduction auctions 149, 155 Orosel, G 110 outsourcing 483 overbidding 149 Pacchione, P 267 package 195, 223 package bidding 193, 203–5 constraints on bids 204 discriminatory tendering on shares 210 participation of many heterogeneous suppliers 196 Palfrey, T 173 Parlane, S 341 participation attracting and screening participants 6, 9–10, 18, 32–6, 267, 276 design of a tendering process and participation 268, 277 methods to increase participation 277, 284, 285 externalities 255 fostering 268 past performance 471 patent system 490, 492, 496 payment system 264 Pekec, R 217 Perez-Castrillo, D Perrigne, I 278 Perry, M 165, 427 Pesendorfer, M 371 Pevnitskaya S 164 Piga, G 15 Pitzer, J T 48 platforms 251–3 advantage of payment systems based on transaction fees 259 divide and conquer strategies 257 fixed costs 260 membership fees and transaction fees 258–9 PMB (Latvia) 27 Pool, C 68 portability 468 Porter, D 238 positive complementarities 8, 194, 204, 215, 253 price-discrimination schemes 256 suppliers choosing between several pricing schemes 259 trade-off between platform and income 196, 258 Vickrey auction solves the exposure problem 202 post contract, 446 pre-contractual 101,104 premiums 291 price discrimination, 490 price discovery 230 activity rules are imposed in clock auctions 232 dual nature of the customer is key 252 multi-lot context, the first open ascending phase ends 289 pricing strategies, 189 private sector private value, 489 542 Index procurement 3, 5, 9, 48, 112, 133 competition 511 different patterns of organizational design 69 discretion and opportunistic behaviors 102 governance 66 legislation 462 health care sector 63 risk 523 strategies procurement contracting 4, 110, 117, 125 complex project 130 economic effects of 83 factors affect the cost 145 internal insurance policies 84 involve small and medium enterprises 85 non-contractible dimensions 117 procurement design 3, 16, 19–31, 214 costly communication 69 cost-plus contracts 124, 126, 128 cross-subsidies delegated procurement object of arbitrage by the contractor 98 procurement practices 5, 14, 42, 54 procurement problem 121, 123 procurement risk, role of 83–5, 100 allocation of 83 contractual form 84 heterogeneous tasks 97 relationship with a selected supplier 125 procuring innovation and risk management in procurement 483, 485, 503–4, 523–6 advantages of ex-ante prizes 487, 489 effects of large buyers on innovation 487, 488, 502, 517 ex-ante prizes, ex-post prices, and research contests 502 government has an incentive to renege 493 innovations by small and medium enterprises (SME) 513 Kremer’s mechanism 494–5, 513 multi-sourcing 330, 516, 526 optimal number of participants 498–500 optional patent system 488, 491–2 procurement and the demand for innovative goods 505–10, 513–15 reaping monopoly rents 486, 522 production cost 5, 86, 172 product differentiation 357 product standardization, 53 production and switching costs 438–9 profit-sharing 95, 493 pseudonymous 456 public administration 508 public administration market place 448 public private partnership (PPP) 92 public procurement 6, 15, 121, 136, 323, 510 Buy American Act in the US 339 and innovation 518–21 litigation over documents 55 PPN 14, 15, 43 profitability in innovative industries 483 public sector 508 purchasing 11, 40, 54, 74–8 bodies 64, 75 decisions 48, 59 procedures 4, 12, 55 systems 7, 47, 75–6 units 57–9, 69 quality contractible 317 monitoring 57 non-contractible 446 Qualls, W 79 R&D 285–6, 483–4, 504, 515–19 effort 512, 520 government contracts 515 innovation 519, 522 inputs 519–20 investments 513, 518, 520 procurement 519 Rassenti, S 217 reciprocation, 459 reciprocity, 474 Reichelstein, S 69 Reiley, D H 273 relative performance evaluation, 497 reneging, conditions for 107, 111 collusive agreement 349 completion of the procurement process 109 repeated procurement, 517 reputation 115, 461 entry reputation, 469–70 feedback 474 money for 471 portability 468 remedies to fight ‘‘feedback trade’’ 474 value of transactions 469 reputation metrics 463–6 impact of manipulation 465 reputation mechanisms 447, 465, 493 Reputation Research Network 480 reputational incentives 116 research contests 496 informatively parsimonious 497 research vs sport contests 498 three possible alternatives 470 untruthful feedbacks 472 reserve price 26, 236, 271, 278, 309 heterogeneity of suppliers production costs 280 lower the expected awarding price 283 mitigates the negative effects of collusion 282 optimality 278 pricing rule 236 profitable to exclude high-cost firms 279 serves two roles 222 Resnick, P 479 543 Index retaliation, 459 Revenue Equivalence Theorem 319, 408 Richardson, J 118 Richter, G 55 Riis, C 118 Riley, J G 292, 408 Riordan, M H 100 risk aversion 56, 84 risk sharing, 283 Rob, R 105 Robinson, M 371–2, 400, 409 Rogerson, W P 98 Rothkopf M 217 Samuelson, W F 292, 408 Samuelson, L 479 Sappington, D E M 100 saving cost 512 lives 77 scoring auctions 294, 419 buyer’s monetary equivalent (BME) 296 concentrated distribution 311 difficulties with complex goods-services contracts 163 ex-post evaluation 300–1 favour parabolic scoring 308 highest bid scoring (Hs) 304, 309 linear and parabolic scoring rules 311 lower cost of small bidders will be reflected in the price 180 lowest bid scoring (Lo) 304, 309 parabolic scoring (PS) 304, 307 price threshold 307, 316, reserve price 311 trade-off between price and quality 294 uniform distribution (asymmetric bidders) 311, 313 scoring rules 294, 308, 314–15, 318, 363, 418, 524 average scoring (As) 304, 310 better to limit ALTs 316 comparative analysis 310 and contractible quality 317 incentives 313 optimal balancing between price and non-price attributes 104 parabolic scoring can also be adjusted to limit the additional score 315–16 price scoring 300, 313 quality score of the bid 318, 418 weighting technical aspects 294 Scotchmer, S 528 sealed bid auctions, sealed bid tendering 5, 7, 19, 42, 143, 155, 164, 220 bidding on packages of contracts 195 element of uncertainty 270 heterogeneous contracts in procurement 196 menu (pay-as-bid) package bidding 203 procurement version of the Vickrey auction 201 second price tendering 20 simultaneous sealed-bid competitive tendering 193 SPCSB competitive bidding 324 Sears, G 123, 131 second lowest price tendering format 11 second sourcing 108, 108 sequential tendering format process 358 Shapiro, C 264 Shaw, M J 75, 79 Shepard, A 187 shill bids 339, 388, 405, 414 shill bidder, 414 Shoham, Y 164, 242 short term switching costs 435 simultaneous ascending auction (SAA) 194, 271 advantages 199 problems 200 rules 286 success 238 simultaneous descending auctions 9, 223, 227–8 analogous to the simultaneous ascending auction 222 basic problem 224 critical elements of 225 limiting the exposure problem 228 simultaneous tendering format/process, 172 Singh, J 137 small business, 515 SMEs (small and medium enterprises) 39 exposure problem 224 not allowing package bids can create inefficiencies 226 Small Business Act 284 Small Business Administration (SBA) 24 Small Business Research Initiative (SBRI) 515 Smith, C 51, 65 Smith, V 217 Spitzer, E 417 Somasundaram, R 68, 75, 79 spectrum auctions 286, 287 Spulber, D F 319 standards, 505 standardization 57 economies of scale 58 facilitates information gathering and processing 57 FPCs are appropriate for standardized products/services 90 product standardization 53, 57–8 quality parameters measureability 85 Stango, V 527 Stapenhurst, R 427 stationery, 57 Steinberg, P 242 Stigler, G J 371, 386 Strategic procurement 3, 53, 61 procurement strategies 4, 15, 55, 58, 66, 73, 296, 435 544 Index structure 6, 7, 126, 350–7 subcontracting, 396 Subramaniam, R 75, 79 suppliers, number of, 328 supply contracts 5, 7, 8, 22, 23, 31, 33, 42, 43, 82, 109, 113, 159, 168, 175, 181, 185, 186, 187, 193, 196, 207, 209, 214, 268, 286, 352, 355, 359, 360, 441, 451, 456, 468, 479, 515 surety bonds 335, 336, 340, 341, 525 survival auctions 164 Swedish National Road Administration (SNRA) 216 Sweet, J 123, 133, 136 switching costs 12, 433 boundaries of the organization 436, 442 create rents to the incumbent 441 low costs 331 negotiate a long term contract with one supplier 435 specific cost 185 Tadelis, S 126, 135, 137 tariffs 252–3, 255–6, 258–60 technical appendix 242–3 tender 5, 8, 19–26, 132, 269, 358 tendering format process 328 tendering procedures 193 threshold problem 205 Tirole, J 61, 117, 83, 122, 265, 319, 443, trading efficiency 116 partner 447 transaction costs 514 fees 250, 252, 258–9 parties 83 partner 456 unfeedbacked 467 transparency, 469 unbundling 97–8, 174 underbidding 150–1, 153, 155–6, 158 UGAP (France) 7–8 urgency 4, 66–7, 77 US Federal Acquisition Regulations – FAR 5, 20 vaccines, 488 Vagstad, S 79 vendor reluctance, 477 verifiable quality 85, 92 vertical integration 251–2, 264 Vickers, J 347 Vickrey auction 194, 415, 419 advantages of the proxy auction 237 clock auction 240 corruption 414 menu package bidding 415 switch from uniform pricing 203 Verdier, T 427 Vincent, D 138 Vuong, Q 278 Wambach, A 35, 341 web based communication 68 procurement 68, 75 Weber, R 154 Weinschelbaum, F 427 Weitzman, M L 94 Welch, B 68 Whang, S 68 Whinston, M D 56, 217 WHO (World Health Organization) 52 Williamson, O E 124 Wilson, R 223, 320 winner’s curse 147, 149, 280, 404 inability to anticipate the effects 153 learning process 159 overbidding 149 underbidding 149, 155 uniform distribution 311 uniform price tendering on shares 211 within-contract competition 107 within-contract methods 106, 111–12 Wolfstetter, E 165, 427 WTO 427 Yahoo 260, 462 Yao., D A 108, 188, 443 Ye, L 134 Yildrim, H 189, 191, 443 Zamir, S 165 Zanza, M 15, 78 Zeckhauser, R 479 Zemsky, P 409 Zheng, C Z 341 Zimmerman, J 51, 65 ... is Professor of Economics at the University of Maryland, USA Chrysanthos Dellarocas is Professor of Information Systems at the University of Maryland, USA Vincenzo Denicolo` is Professor of Economics... Associate Professor of Economics at the University of Rome Tor Vergata, Italy Achim Wambach is Professor of Economics at the University of Cologne, Germany Elmar Wolfstetter is Professor of Economics... Bajari is Professor of Economics at the University of Minnesota, USA Paolo Buccirossi is Director of LEAR (Laboratory of Economics, Antitrust, Regulation), Italy Luis Cabral is Professor of Economics