fixed effetcs auction - THE JOURNAL OF INDUSTRIAL ECONOMICS...

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AN EMPIRICAL ANALYSIS OF ENTRANT AND INCUMBENT BIDDING IN ROAD CONSTRUCTION AUCTIONS ± DakshinaG. De Silva w ,TimothyDunne, z and Georgia Kosmopoulou z This paper explores differences in the bidding patterns of entrants and incumbents in road construction auctions. We ±nd that entrants bid more aggressively and win auctions with signi±cantly lower bids than incumbents. The differences in their bidding patterns are consistent with a model of auctions in which the distribution of an entrant’s costs exhibits greater dispersion than that of an incumbent’s and relations of stochastic dominance in the distributions do not persist for the entire range of estimated costs. We also ±nd that more ef±cient ±rms bid, on average, more aggressively and ±rms with greater backlogs bid less aggressively. I. INTRODUCTION T HIS PAPER COMPARES the bidding patterns of entrant and incumbent ±rms in road construction auctions that took place between January of 1997 and August of 2000 in the state of Oklahoma. In any market, entrants or the threat of entry should act to increase competition. The bene±ts of competition can be even greater in procurement auctions where in practice there is a considerable history of collusion. 1 Larger participation can reduce substantially the returns of any bidding ring. However, entering ±rms may be at a signi±cant disadvantage relative to incumbents in these auctions. Entrants may face higher uncertainty in the development of a bid, since they lack bidding and production experience. They may also have access to less information than incumbent bidders regarding the pricing and cost of various bid components. On the other hand, incumbents facing entrants may be faced with a potential bidder they know little about, and hence, their bidding may be influenced by the presence of entrants. Such asymmetries have not been emphasized in the auction literature. r Blackwell Publishing Ltd. 2003, 9600 Garsington Road, Oxford OX4 2DQ, UK, and 350 Main Street, Malden, MA 02148, USA. 295 THE JOURNAL OF INDUSTRIAL ECONOMICS 0022-1821 Volume LI September 2003 No. 3 ± The authors wish to thank George Deltas, two anonymous referees, the editor and the participants of the seminar series of the University of Missouri-Columbia for providing useful comments. We are indebted to Brad Hartronft for providing us with useful information about ODOT auctions. w Authors’ af±liations: Department of Economics, Texas Tech University, Lubbock, TX 79409-1014, USA. email: z Department of Economics, University of Oklahoma, Norman, OK 73019-2103, USA. email: email: 1 See, for example, the work byPorter andZona [1993],Bajari [2001 andBajari andYe [2001, 2002] for analyses of bid-rigging and collusive behavior in procurement auctions.
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Our paper documents differences in the bidding patterns and the winning bids between entrants and incumbents in Frst price sealed bid auctions. We Fnd that entrants bid more aggressively than incumbent bidders and win auctions with signiFcantly lower bids than incumbents do. We also show
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fixed effetcs auction - THE JOURNAL OF INDUSTRIAL ECONOMICS...

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