Auctions Versus Negotiations in Procurement: An Empirical Analysis

Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we consider several possible determinants that may influence the choice of auctions versus negotiations. We then examine a comprehensive data set of private sector bui...

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Bibliographic Details
Published in:Journal of law, economics, & organization economics, & organization, 2009-10, Vol.25 (2), p.372-399
Main Authors: Bajari, Patrick, McMillan, Robert, Tadelis, Steven
Format: Article
Language:English
Subjects:
Auctions
Bargaining
Bidding
Bids
California
Communication
Competition
Competitive bidding
Competitiveness
Construction
Construction industries
Construction industry
Contract negotiations
Contractors
Contracts
Decision making
Determinants
Economic theory
Economics
Fixed price contracts
Hypotheses
Negotiations
Private sector
Procurement
Public sector
Purchasing
Studies
U.S.A
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Summary:Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we consider several possible determinants that may influence the choice of auctions versus negotiations. We then examine a comprehensive data set of private sector building contracts awarded in Northern California during the years 1995–2000. The analysis suggests a number of possible limitations to the use of auctions. Auctions may perform poorly when projects are complex, contractual design is incomplete, and there are few available bidders. Furthermore, auctions may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project. Some implications of these results for procurement in the public sector are discussed (JEL D23, D82, H57, L14, L22, L74).
ISSN:8756-6222
1465-7341
DOI:10.1093/jleo/ewn002