Bidding for unit-price contracts: how craftsmen should bid

Karsten Fieseler

No 97-03, Papers from Sonderforschungsbreich 504

Abstract: We analyse the bidding for unit-price contracts, a very common procurement auction. With a unit price contract, not the provision of the good but the employment of several kinds of inputs is priced. The seller charges a unit price for the employed quantity of each input. To select one seller, a linear selection rule is used to rank submitted lists of unit prices. In this paper, we model heterogeneous technologies of craftsmen: firms differ in their requirement of input-quantities. An equilibrium of this model is found. The composition of submitted lists does not mirror the cost structure and the selection probability is not monotone in the type. Sometimes the ''lamer'' of two craftsmen is selected, enhancing all but the very lame types to bid very aggressively. Caused by this, unit-price bidding can be cheaper (require a lower expected payment) than standard auctions like the first price auction.

Date: 1997
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