We study procurement auctions held in sequential and simultaneous formats. For thelatter format, we find less bid participation and more aggressive bidding for projects withstrong common value components and more competition for projects having strong privatevalue components.microeconomics ;

De Silva, Dakshina

Pagel, Beatrice

Peeters, Ronald

English

Research Papers in Economics

Dakshina De Silva, Beatrice Pagel,  
Ronald Peeters 
 
Sequential versus Simultaneous Auctioning of 
Procurement Contracts with Common Value and 
Private Value Components 
 
RM/08/005 
 
 
JEL code: D44, H57 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maastricht research school of Economics 
of TEchnology and ORganizations 
 
Universiteit Maastricht 
Faculty of Economics and Business Administration 
P.O. Box 616 
NL - 6200 MD Maastricht 
 
phone  : ++31 43 388 3830 
fax  : ++31 43 388 4873 Sequential versus Simultaneous Auctioning of Procurement
Contracts with Common Value and Private Value Components∗
Dakshina De Silva† Beatrice Pagel‡ Ronald Peeters§
March 2008
Abstract
We study procurement auctions held in sequential and simultaneous formats. For the
latter format, we ﬁnd less bid participation and more aggressive bidding for projects with
strong common value components and more competition for projects having strong private
value components.
JEL classiﬁcation: D44; H57.
Keywords: Procurement auctions.
1 Introduction
In an eﬀort to reduce operational costs, the Oklahoma Department of Transportation (ODOT)
decided in March 2002 to change the design of their monthly procurement auctions for road
construction contracts. Until this date, ODOT auctioned oﬀ the contracts in two separate
sessions on a single day, with half of the contracts being simultaneously auctioned in the
morning (AM) and the other half in the afternoon (PM). Prior to the PM-auctions, all
submitted bids in the AM-auctions were publicly revealed. Since this date, all projects were
auctioned simultaneously in one single session.
Ortega Reichert (1968) and Hausch (1986) both study a two-bidder, two-period, sequential
ﬁrst-price sealed-bid procurement auction where bidders demand more than one object and
learn all ﬁrst period bids prior to the second period. Ortega Reichert (1968) studies the case
where at the beginning of each period, bidders are privately informed about their costs for
the contracts, which are independently drawn from an exponential distribution with unknown
∗Financing by METEOR (Maastricht research school of Economics of TEchnology and ORganizations) and
NWO is gratefully acknowledged.
†Department of Economics, Texas Tech University, Lubbock, TX 79409-1014, USA. E-mail: dakshina.de-
silva@ttu.edu.
‡Student MSc IES, Universiteit Maastricht, The Netherlands. E-mail: bea pagel@hotmail.com.
§Department of Economics, Universiteit Maastricht, P.O. Box 616, 6200 MD, Maastricht, The Netherlands.
E-mail: R.Peeters@algec.unimaas.nl. Corresponding author.
1parameter. He shows that there is a ‘deception eﬀect’. That is, he ﬁnds that each bidder
has an incentive to bid less aggressively in the ﬁrst auction, compared to a one-shot auction,
in order to induce the rival to hold a more pessimistic belief about the unknown parameter.
Hausch (1986) studies the case with a common cost for the two identical objects, but where
the two bidders receive diﬀerent estimates about the true cost. Besides the deception eﬀect,
he shows there is an ‘informational eﬀect’ that leads to more aggressive bidding in the second
period, compared to a one-shot auction.
Li and Zheng (2006) and De Silva et al. (2007) study the eﬀect of endogenous auction
entry on bidding behavior. The ﬁrst concentrates on the IPV setting only; the second on the
more general aﬃliated value setting, for which the IPV and CV setting are the polar cases. In
line with the contestable markets literature, these papers ﬁnd the negative ‘competition eﬀect’
(more actual bidders increase bid aggression) and the positive ‘entry eﬀect’ (more potential
bidders lead to less actual bidders).
Using the data from January 1997 to June 2004, we evaluate the impact of the design
change on bidding participation and bidding behavior. Like the distinction often made in
the theoretical literature, we distinguish between projects having a strong common value
component and those having a strong private value component. We ﬁnd that for the ﬁrst
type, the policy change has triggered more aggressive bidding behavior, but a decrease in the
probability to submit a bid (without decreasing the total number of bidders). For the latter
type, we ﬁnd that only the number of bidders has increased. These results have the potential
to observe a decrease in procurement costs for both project types. However, the tests do not
lend strong support for this potential observation.
2 Data
Roughly one month prior to the auction letting, bidders learn the detailed project description,
the estimated completion time, the engineering cost estimates (ECE) and the plan holder list
(the list of potential bidders). Apart from the design change implemented in March 2002,
there are no further design diﬀerences among auctions held in the period between April 2000
and June 2004.1 We use data from January 1997 to March 2000 to create variables based on
bidder history such as capacity utilization and potential rivals’ capacity commitment. Data
from April 2000 to June 2004 are used to analyze the empirical models. For each project, we
know the plan holders, all bids submitted, the winning bid and the winner. These data were
gathered from the plan holder list, as read bid report, low bid report, and award notices that
are posted on the ODOT website.
1The ECE are only revealed since April 2000.
2This unique natural experiment allows us to evaluate the impact of the design change
on bidding participation and behavior. We do this for auctions having a strong private
value component and those having a strong common value component separately. Following
De Silva et al. (2008), we categorize asphalt work as projects having a large private value
component and bridge work as projects having a strong common value component.
Table 1 summarizes for the two diﬀerent project types (asphalt and bridge), the number
of auctions, the average number of plan holders per auction, average number of bidders per
auction, and the average bid relative to the ECE.
Variable AM-auctions PM-auctions Auctions
before March 2002 before March 2002 after March 2002
Asphalt Bridge Asphalt Bridge Asphalt Bridge
Number of auctions 93 172 87 153 294 348
Number of plan holders 3.828 6.081 4.149 6.150 4.578 7.000
per auction (1.810) (2.576) (2.003) (2.628) (2.467) (2.813)
Number of bidders 2.419 3.663 2.770 3.732 2.755 3.925
per auction (1.393) (1.774) (1.344) (1.846) (1.380) (1.708)
Relative bid 1.050 1.075 1.045 1.046 1.061 1.038
(0.195) (0.270) (0.212) (0.366) (0.169) (0.408)
Table 1: Summary statistics.
Standard deviations are in brackets.
3 Empirical model and results
First, we test how the design change has aﬀected bidding behavior in Oklahoma. Our econo-
metric speciﬁcation, allowing for diﬀerential eﬀects across the three time periods, is
rbidiat = αi + β1DPM
t + β2DSim
t + XΓ + εiat,
where the unit of observation is ﬁrm i bidding in auction a in time period t. The relative
bid (bid/ECE) is used as the dependent variable throughout this analysis. The indepen-
dent variables include controls for the change in the timing of auctions, variables on auction
characteristics, bidder characteristics, rival characteristics and characteristics of the business
environment. β1 measures the diﬀerence in bidding in PM-auctions relative to AM-auctions.
β2 captures the diﬀerence in bidding between simultaneous auctions and AM-auctions.
We use an auction-level variable—the expected number of bidders—to control for bidding
competition.2 Moreover, we include two variables that measure bidder cost heterogeneity
in addition to ﬁrm ﬁxed eﬀects: bidder’s capacity utilization rate and bidder’s distance to
a project. In order to control for bidder experience, we include dummies to identify new
2This variable is constructed in a similar manner as in Hendricks et al. (2003).
3bidders in the market and ‘incumbents’ facing these ‘entrants’.3 When controlling for rival
characteristics, we include the rivals’ minimum distance to the project and the minimum
backlog.4 Finally, we control for the business environment using four variables.5
All models are estimated with robust standard errors. The ﬁxed eﬀects models are esti-
mated with ﬁrm ﬁxed eﬀects to control for bidder heterogeneity. Here, we use only multiple
bids submitted by bidders. The standard errors reported are cluster-robust where the clus-
tering is on ﬁrms.
The key parameters of interest in Table 2 are β1 and β2. The OLS results indicate that
for bridge work, bidders bid more aggressively in PM-auctions and in simultaneous auctions
relative to AM-auctions. For winning bids and bids when controlled for bidder heterogeneity,
we observe similar results, though there is weak support for aggressive bidding in simultaneous
settings. For asphalt work, we do not observe any statistical diﬀerence among the auctions
in the sequential (AM and PM) and simultaneous format.
Variable OLS With ﬁrm eﬀects
Bids Winning bids Bids
Asphalt Bridge Asphalt Bridge Asphalt Bridge
(1) (2) (3) (4) (5) (6)
PM bids (β1) -.015 -.043** -.027 -.051* .001 -.039*
(.019) (.018) (.022) (.029) (.018) (.023)
Bids after .016 -.057** .031 -.044 .008 -.016
March 2002 (β2) (.025) (.026) (.030) (.040) (.032) (.051)
# of obs. 1275 2565 396 589 1257 2531
Adj. R2 .070 .093 .045 .018 .053 .040
p-value for β1 = β2 .221 .616 .063* .871 .818 .704
Table 2: Regression results for relative bids and relative winning bids.
** denotes statistical signiﬁcance at the 5% level and * at the 10% level. All regressions include
controls for auction, bidder, rivals, and business characteristics. In columns (1) and (2) we
have included bidder experience dummies and bidder experience dummies interacted with PM
and after March 2002 dummies.
Besides individual bidding behavior, the design change may have aﬀected bidder partic-
ipation and bid submission. Table 3 displays Poisson results for participation, the Probit
results for bid submission, and the probability of winning conditional upon bidding. We
observe that, after the policy change in March 2002, the number of potential bidders has
3These variables are similar to the ones used in De Silva et al. (2003).
4These variables are similar to variables used in Bajari and Ye (2003), Jofre-Bonet and Pesendorfer (2000)
and De Silva et al. (2005).
5The ﬁrst is the monthly, seasonally unadjusted, state-level unemployment rate for Oklahoma, gathered
from the US Bureau of Labor Statistics. Next, we use the three-month average of the real volume of projects,
constructed from the ECE. In addition, we consider the state-speciﬁc three-month average of the number of
building permits collected from the US Bureau of Economic Analysis. These controls have also been used in
De Silva et al. (2008).
4increased for asphalt and bridge work. However, the number of actual bidders increased only
for asphalt work. We ﬁnd no statistically signiﬁcant diﬀerence in bidder participation between
AM- and PM-auctions. Moreover, we observe that the probability of bidding upon being plan
holder has decreased for bridge projects. Again, we ﬁnd no statistically signiﬁcant diﬀerences
between AM- and PM-auctions.
Variable # of plan holders # of bidders Bid submission Winning cond.
upon bidding
Asphalt Bridge Asphalt Bridge Asphalt Bridge Asphalt Bridge
(1) (2) (3) (4) (5) (6) (7) (8)
PM bids (β1) .044 -.062 .078 -.056 .028 .005 -.005 .018
(.253) (.263) (.200) (.177) (.037) (.023) (.043) (.025)
Bids after 1.395** 1.341** .698** .237 -.050 -.063** -.088 -.011
March 2002 (β2) (.323) (.371) (.220) (.252) (.048) (.031) (.058) (.034)
# of Obs. 389 589 396 589 2063 4421 1275 2565
Wald χ2 316.26 255.62 148.37 194.47 65.40 79.52 34.36 34.65
Table 3: Participation patterns and bid submission results.
** denotes statistical signiﬁcance at the 5% level and * at the 10% level. For the regressions
in columns (1)–(4) we use only auction and business condition variables; for columns (5)–(8)
we included ﬁrm and rivals characteristics in addition to auction and business level variables.
4 Conclusion
In this paper we investigate the impact of the latest design change in the ODOT procurement
auctions on bidding participation and behavior for projects having a strong private value
component and those having a strong common value component. We ﬁnd that for the latter
project type, the policy change has triggered more aggressive bidding behavior and decreased
the probability on auction entry among potential bidders. These results are in line with
Hausch (1986) and De Silva et al. (2007).
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6

A sequential game with information ﬂow. Chapter VIII of PhD thesis,

An empirical analysis of entrants and incumbents bidding in road construction auctions.

Bidding behavior in a repeated procurement auction: A summary.

Deciding between competition and collusion.

Empirical implications of equilibrium bidding in ﬁrst-price, symmetric, common value auctions.

Entry and competition eﬀects in ﬁrst-price auctions: Theory and evidence from procurement auctions. CeMMAP working paper CWP13/06.

Multi-object auctions: Sequential vs. simultaneous sales.

Optimal bidding behavior under common and private values in auctions with an unknown number of rivals due to endogenous entry.

Stochastic synergies in sequential auctions.

The impact of public information on bidding in highway procurement auctions.

Sequential versus Simultaneous Auctioning of Procurement Contracts with Common Value and Private Value Components

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Sequential versus Simultaneous Auctioning of Procurement Contracts with Common Value and Private Value Components

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