Benefits of Procurement Auctions: Competitive Pressure vs. Selection of Efficient Suppliers

Project Start:12/2016
Researchers:Rafael Lalive, Armin Schmutzler, Christine Zulehner
Category: Financial Intermediation
Funded by:LOEWE

We study how the quantity of regional train services and the procurement price in Germany change when an agency uses procurement auctions rather than negotiations. We exploit a 1996 reform that allowed regional rail agencies to use procurement auctions. Our empirical analysis shows that procurement auctions increase the frequency of service by 12%, and decrease the procurement price of a train kilometer by about 23\%. Adopting a structural auction framework, we find that the price reduction has two sources. Competitive pressure reduces markups substantially, and more efficient suppliers participate in the auction, reducing costs. Procurement auctions increase surplus on regional railway lines by about 20%.