Procurement Efficiency in Public Procurement Auctions: Analysis of Different Types of Products

Abstract

Different types of products are procured in government procurement auctions. This paper empirically analyzes the effect of competition (number of bidders) on procurement price of different types of products. In other words, we investigate the optimal number of bidders which minimizes procurement costs in auctions for services, goods and construction. We use a unique data set provided by the Public Procurement Authority (PPA) of Turkey that covers all government procurement auctions for the years 2004-2009. This paper has three major results. First, after controlling for possible endogeneity, we show that the number of bidders significantly and negatively affects the procurement price. Thus, existence of a more competitive environment significantly decreases procurement costs in Turkey. Second, when auctions are open to foreign participation, the auction price tends to be lower. This is caused by an increase in the competitiveness of the auctions; detailed analysis of bidder participation to Turkish procurement auctions shows that number of bidders is significantly higher when auctions are open to foreign participation. Finally, the optimal number of bidders to take the full advantage of competition differs among auctions for different types of products. At least eight bidders are needed for services, seven for the goods sectors and at least thirteen bidders are required to be able to achieve the lowest procurement price possible for the construction auctions. The results of this paper has several policy implications for efficient procurement design.

Keywords: Public Procurement Auctions, Competition Effects, Sectoral Differences

JEL Classification: C31, D44, H57