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471. For how long should bids be valid in a procurement auction?
Invited abstract in session TD-36: Game Theory, Solutions and Structures VIII, stream Game Theory, Solutions and Structures.
Tuesday, 14:30-16:00Room: 32 (building: 306)
Authors (first author is the speaker)
| 1. | Panos Lorentziadis
|
| Business Administration, Athens University of Economics and Business |
Abstract
Bids in procurement auctions are typically required to remain valid for a certain period of time. If the underlying cost changes in time, as for example due to inflationary economic conditions or changes of the production input prices, the eventual profit when awarding takes place may be dramatically lower than anticipated. To address this risk, bidders can impose an upper bound constraint on the probability that the final mark-up stays below a pre-determined level. In this setting we derive the equilibrium bidding strategies when the cost change is realized continuously or in discrete steps. We determine the effect of the validity time to the expected bidder profit and show how bidders can profit if the risk is correctly managed. On the other hand, we demonstrate that the contracting authority always suffers for a prolonged validity time in terms of the expected procurement project cost and we develop methods to determine the optimal time within which bids are valid. We explore and compare methods of price adjustments which can partially or totally compensate against cost change. We conclude with a discussion of the findings and recommendations for both bidders and auctioneers on the efficient management of this kind of risk.
Keywords
- Auctions / Competitive Bidding
- Revenue Management and Pricing
Status: accepted
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