Konkurrensverket Working Paper Series in Law and Economics,
Konkurrensverket (Swedish Competition Authority)

Abstract: There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement model with reputation for quality and the possibility of entry in which the entrant may start off with positive reputation. Our results suggest that while some past-performance based reputational mechanisms can reduce the frequency of entry, appropriately designed mechanisms significantly stimulate it. We find that our reputational mechanism increases quality but not prices, so that the introduction of this kind of mechanism may generate large welfare gains for the buyer.

Keywords: Cross-border procurement; Entry; Feedback mechanisms; Incomplete contracts; Limited enforcement; Incumbency; Multidimensional competition; Outsourcing; Past performance; Procurement; Quality assurance; Small business subsidies; Reputation; Vendor rating

JEL-codes: H57; L14; L15

53 pages, May 15, 2013

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