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The Design of Combinatorial Auctions for Procurement: An Empirical Study of the Chilean School Meals Auction

Marcelo Olivares, Gabriel Weintraub, Rafael Epstein, Daniel Yung

Publication type: Working paper

Research Archive Topic: Operations, Risk Management

Abstract

In this paper we conduct an empirical investigation of a large-scale combinatorial auction (CA); the Chilean auction for school meals in which the government procures half a billion dollars worth of meal services every year. Our empirical study is motivated by two fundamental aspects in the designof CAs: (1) which packages should bidders be allowed to bid on; and (2) diversifying the supplier base to promote competition. We use bidding data to uncover important aspects of the firms’ cost structure and their strategic behavior, both of which are not directly observed by the auctioneer. Based on these estimates we analyze and suggest important improvements to the auction design. Our results indicate that package bidding should be flexible enough so that firms can express their cost synergies due to economies of scale and density. However, we also found evidence that firms can take advantage of this flexibility by discounting package bids for strategic reasons and not driven by cost synergies. Because this behavior can lead to inefficiencies, we identify certain specific combinations that perhaps should be prohibited in the bidding process. Our results also suggest that market share restrictions and running sequential auctions promote competition in the long-run, without significantly increasing the short-run cost for the government due to unrealized cost synergies. Our results highlight that the simultaneous consideration of the firms’ operational cost structure and their strategic behavior is key to the successful design of a CA. More broadly, our paper is the first to provide an econometric study of a large-scale CA, providing novel and substantive insights regarding bidding behavior in this type of auctions.


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Citation

Olivares, Marcelo, Gabriel Weintraub, Rafael Epstein, and Daniel Yung. "The Design of Combinatorial Auctions for Procurement: An Empirical Study of the Chilean School Meals Auction." Working paper, Columbia Business School, January 2011.


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