Buying from the Fringe (too)

Abstract

We analyze how to divide the requirements of a (public) firm into lots, when potential suppliers suffer from heterogeneous diseconomies of scale. The optimal design leads to all firms, included the disadvantaged competitors, the fringe, being active, despite the concomitant cost of increasing supplier profit. Setting large lots that only large firms can produce competitively is necessary; but also setting small lots that the fringe firms can competitively bid for, reduces procurement cost. If, in addition, some medium-sized lots are set aside for the fringe –as allowed by the US regulations, but not by the EU ones– procurement cost is further reduced. JEL: H57, K23, L23, L51.