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Price-quality trade-off in procurement auctions with an uncertain quality threshold

Ying Yao and Makoto Tanaka

Journal of Economic Behavior & Organization, 2020, vol. 177, issue C, 56-70

Abstract: Procuring high-quality goods at reasonable prices is a critical public sector concern. Yet, procurers often do not advertise clear weighting rules for price and quality but set a flexible quality threshold upon participation. This paper studies endogenous entry and bidding behavior in such procurement auctions. Using unique data on pharmaceutical procurement in Guangdong, China, we find that a high-quality index acts as a signal of high production costs. We also observe that high-quality bidders are more likely to withdraw from bidding because of their prior commitment to quality. The procurers who use quality indicators in price auctions need a carefully considered quality threshold. Our results have important implications for price-quality trade-offs in procurements that have uncertain quality thresholds.

Keywords: Quality evaluation; Quality threshold; Pharmaceutical procurement (search for similar items in EconPapers)
JEL-codes: H57 I18 L20 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:177:y:2020:i:c:p:56-70

DOI: 10.1016/j.jebo.2020.06.005

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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