Market Competition and the design
of tendering procedures
STSM of Fabio Sciancalepore at University of the Aegean
Fabio Sciancalepore, Politecnico di Bari
Athena Roumboutsos, University of the Aegean
Nunzia Carbonara, Politecnico di Bari
Open Day,
22 March 2012
PPP in Transport:
Trends & Theory
Research Question
Common Q:
 How to design a tendering procedure which will improve
competition in the market?
or
 How to call in more and “improved” offers?
New Approach Q:
 How to exploit all existing competition in the market through
the tendering procedure ?
or
 The number of bidders in a particular market situation is given.
How to a design the bidding process to suit this number?
Open Day,
22 March 2012
PPP in Transport:
Trends & Theory
Overview
 Purpose: To develop a “tool” to identify the optimum
value tendering procedure, stemming from the
existing level of competition in a PPP market.
 Approach: Analytical models, initially proposed by
McAfee & McMillan, are further investigated with
respect to the various tendering procedures, by
recalling the dynamics of transaction costs for
competitors in PPP market.
Open Day,
22 March 2012
PPP in Transport:
Trends & Theory
Problem parameters
 k: the transaction cost






Sector/subsector
Country
Project complexity
Project size
Tendering Process
Proxy time
Tendering Process
Tendering Phases Procedure
Pre-qualification
Binary
Tender
Evaluation
Price Based
Price &
Threshold quality
Scoring System
Negotiation
Open Day,
22 March 2012
Dialogue
PPP in Transport:
Trends & Theory
Bidding Equilibrium Models with
Transaction Costs
Lowest Price

bi   i  k
 i  
k


 1  F( )
for
Where
bi  max (b j )
j i
otherwise
F( )d  k
i1

 πi = profit for the i-th bidder
 θi = production cost for the i-th
bidder
 k = transaction cost
 F(θ) = cumulative density
probability function
 Production cost function
,  0.1
1
k
n(n 1)
Open Day,
22 March 2012

PPP in Transport:
Trends & Theory
Bidding Equilibrium Models with
Transaction Costs
Lowest Price with Quality
Threshold

bi  c i (qi , i )  k
for
 i  

otherwise
k

 c ( , )1  F( )
'
i1
*
i
Where
bi  max (b j )
j i
*
qi  
F( )d  k

 πi = profit for the i-th bidder
 C(qi, θi )= production cost for
the i-th bidder
 k = transaction cost
 F(θ) = cumulative density
probability function
 Production cost function
,  0.1
(n 1)
k
16n
1
 Major Assumption: V(q) = q½
(conservative approach)
3

Open Day,
22 March 2012
PPP in Transport:
Trends & Theory
Tender Process Guidance Tool
0.5
0.45
0.4
Unrealistic Market
High Transaction Costs &
Many Bidder
0.35
0.3
0.25
0.2
0.15
Competitive
Market
0.1
0.05
Quality Threshold
Uncompetitive Market
0
1
2
Open Day,
3
22 March 2012
4
5
6
7
PPP in Transport:
Trends & Theory
8
Discussion
 A competitive market is achieved (practically for all
ks) with a small number of bidders and quality criteria
 Minimizing tender transaction costs (k) produces
surplus for the bidders in the market
 A surplus supports further market concentration
 Contracting authority needs to request “more” to
compensate for “surplus”
Open Day,
22 March 2012
PPP in Transport:
Trends & Theory
Future Research
 Investigate further the “quality criterion” equilibrium
 V(q) = q
 V(q) = q2
 Estimations of k:
 Sector/ Subsector specific
 Country specific
 Function of time, t
Open Day,
22 March 2012
PPP in Transport:
Trends & Theory
Thank you!
Athena
Fabio and Nunzia
Open Day,
22 March 2012
PPP in Transport:
Trends & Theory