Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: Combinatorial procurement auctions are desirable as they enable bidding firms to pass their potential cost synergies on to the procuring entity and may lead to a reduction in cost for the procuring entity and enhancing efficiency. However, an assessment of the benefits of the combinatorial mechanism, based on the observed package discounts, is likely to overstate the true cost savings generated by the mechanism. The option for a firm to submit bids on bundles of contracts gives rise to a strategic effect because a firm’s stand-alone bids compete with its package bids. Therefore, bidders might find it profitable to inflate their stand-alone bids in order to favour their package bids. Using data from first-price procurement auctions of single and multiple contracts, with and without the option to submit package bids, we find that firms inflate their stand alone bids in the combinatorial auctions compared to their corresponding bids in standard first-price procurement auctions. Further, the analysis does not show significant differences in the procurer’s cost by type of auction.

Keywords: Combinatorial procurement auctions; Contract bidding

JEL-codes: D44; H57

16 pages, First version: August 13, 2009. Revised: September 16, 2009.

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