Skew to win, not to profit – unbalanced bidding among informed bidders

Abstract

Purpose

Several sectors, especially the construction industry, use unit price contracting (UPC). This contracting form provides agents, ex ante, with estimated quantities of the work to be done. Competing agents then offer corresponding unit prices i.e. the bid is a price vectors, and most often the lowest vector sum is awarded the contract. This way of procuring is not only transparent but also entails a potential problem of unbalanced bidding. Unbalanced bidding occurs when an informed agent skews unit prices to win the ex ante bid. The concept is not new topic in research, but theoretical models from an economics perspective are not extensive.

Design/methodology/approach

This paper will focus on how competition among informed bidders will affect the optimal solution.

Findings

It is shown that skewing is still a dominating strategy under competition. However, competition will decrease, but not necessarily eliminate, information rents.

Originality/value

In this setting, unbalanced bidding could mainly be seen as a way to win the contract and not to extract information rents. Thus, it would not constitute an efficiency problem for the client.

Citation

Nyström, J. and Mandell, S. (2019), "Skew to win, not to profit – unbalanced bidding among informed bidders", Journal of Public Procurement, Vol. 19 No. 1, pp. 46-54. https://doi.org/10.1108/JOPP-03-2019-024