Design of Auction Parameters to Reduce the Effect of Collusion

Abstract

Government departments are increasingly turning to auctions to procure goods and services. Collusion among bidders, however, reduces competition and raises winning bid prices. Since conventional collusion control measures based on the redesign of auction mechanisms are less effective in government procurement auctions, there is a need to devise control measures that decrease the effect of collusion. This article demonstrates how the principles of design of experiments can be applied in a system dynamics model to find the auction parameter values that substantially reduce the effect of collusion in government procurement auctions. This research makes a number of contributions. First, it develops a feedback-based dynamic mechanism of collusion in government procurement auctions. The mechanism proposes the winning bid price as being determined not by the total number of bidders but by the number of independent bidders. It defines each cartel as one independent bidder regardless of the number of bidders in the cartel. Second, the mechanism is tested by developing a system dynamics model to government auctions for procuring contracts for roadwork projects in India. Third, the principles of experimental design are applied to find the auction parameter values that ensure high bid participation and low winning price-to-reserve price ratios.

Two‐stage market clearing approach to mitigate generator collusion in Eastern China electricity market via system dynamics method

“…In [18], an SD model for analysing the impacts of floating price policy on oil market was established. Padhi et al [19] introduced an SD approach for parameters design of the government procurement auction policy in India. The SD method is also found to be adopted in the power system field.…”

“…• The electricity market consists of many interacting factors with dynamically changing values. The SD method can explicitly model the circular causalities and non-linear relationships among factors [19]. • Since the electricity market in China is immature (which is detailed in Section 2.1), the market rules need to be updated frequently to adapt to unexpected situations.…”

“…• Since the electricity market in China is immature (which is detailed in Section 2.1), the market rules need to be updated frequently to adapt to unexpected situations. Extensive tests and changes for market rules can be conducted by the SD model [19]. It is easy for policy makers to change parameters in the rules and evaluate the impacts through the visual and userfriendly interface of the SD model.…”

Technology diffusion: Shift happens — The case of iOS and Android handsets

“…To develop a causal model of the handset diffusion process, we used the system dynamics methodology (SD) (Forrester, 1961). It has been successfully applied to study the temporal behavior of systems in a wide variety of application domains (Forrester, 1994) including supply chain and inventory management (Morecroft, 1983), environmental policy making, managing research and development strategies (Garcia et al, 2003), project management, collusion in auctions (Padhi et al, 2016) etc. For brevity, the conceptual building blocks of SD are presented in parallel with the development of the models themselves.…”

Supply Chain Decisions in Governmental Organizations

“…Padhi, Wagner and Mohapatra () use a design of experiments approach, associated with a systems dynamic model, to identify parameters that would improve public procurement auctions to reduce the effect of collusion. Public procurement auctions are often used to select suppliers and award contracts through competitive bidding for government contracts.…”