An Empirical Analysis of Entrant and Incumbent Bidding in Road Construction Auctions

Abstract

This paper explores differences in the bidding patterns of entrants and incumbents in road construction auctions. We find that entrants bid more aggressively and win auctions with significantly lower bids than incumbents. The differences in their bidding patterns are consistent with a model of auctions in which the distribution of an entrant's costs exhibits greater dispersion than that of an incumbent's and relations of stochastic dominance in the distributions do not persist for the entire range of estimated costs. We also find that more efficient firms bid, on average, more aggressively and firms with greater backlogs bid less aggressively.Ã The authors wish to thank George Deltas, two anonymous referees, the editor and the participants of the seminar series of the University of Missouri-Columbia for providing useful comments. We are indebted to Brad Hartronft for providing us with useful information about ODOT auctions.wAuthors' affiliations: ] for analyses of bid-rigging and collusive behavior in procurement auctions. Ã Denotes 95% significance. Regressions include six project class dummy variables.Ã Denotes 95% significance. Regressions include six project class dummy variables. 17 The supplementary regressions discussed here can be found at the Journal's editorial Web site.

Bidder Asymmetry in Infrastructure Procurement: Are There any Fringe Bidders?

“…For example, one might think that fringe incumbents would be unlikely to obtain the object. The current paper follows De Silva, et al (2002;2003) and reinforces their definition; they define entrants as firms who did not bid in the first half of the sample period, and use data from the second half for their main analysis. This is not a perfect solution, and especially its great disadvantage is that half observations are discarded.…”

“…If a bidder is composed of more than one firm, all figures of the member firms are added up. This proxy is supposed to capture the potential differences in efficiencies across bidders (De Silva, et al, 2003). Firms with more prior-winning experience may be able to be presumed more efficient, whence continuing to submit low bids.…”

“…Another is the share of incumbent bidders in each auction. This is additional to the existing literature but basically expected to play the same role as the measure of rivals' competitiveness, such as the past average winning ratio used by De Silva, et al (2003). However, particular attention is paid to the extent to which presumably strong incumbents participate in each auction by using the incumbent concentration variable.…”

“…Empirically, De Silva, et al (2002;2003), investigating the case of Oklahoma State's auction market for road construction projects, finds that new entrants actually bid more aggressively than incumbents did, especially in the lower tail of the bid distribution. Of particular note, in their analysis only 70 entrant bids are identified out of about 2,800 bids.…”

First-price equilibrium and revenue equivalence in a sequential procurement auction model

“…De Silva et al (2003) provide an asymmetric, static bidding model to explore differences in bidding patterns observed in road construction auctions. In their model, firms' distributions of completion costs differ from one another which is motivated by the idea that firms are either incumbents or entrants implying that bidders with identical completion costs differ in bidding behavior; particularly, entrants bid more aggressively than incumbents which is statistically confirmed in their empirical analysis.…”