Split-award procurement auctions with uncertain scale economies: Theory and data

In a number of observed procurements, the buyer has employed an auction format that allows for a split-award outcome. We focus on settings where the range of uncertainty regarding scale economies is large and, depending on cost realizations, the efficient allocations include split-award outcomes as well as sole-source outcomes (one active supplier). We examine the price performance and efficiency properties of split-award auctions under asymmetric information. In equilibrium, both award outcomes can occur: the split-award outcome arises only when it minimizes total costs; sole-source outcomes, however, occur too often from an efficiency viewpoint. Equilibrium bids involve pooling at a common price for the split award, and separation for sole-source awards. We provide conditions under which the buyer and suppliers all benefit from a split-award format relative to a winner-take-all unit auction format. Model predictions are assessed with data on submitted ‘step-ladder’ bid prices for a US defense split-award procurement. (JEL Classification C72, D44, D82, L13) ∗An early version of this paper was circulated under the title ‘Equilibrium Bids and Scale Economies in Split—Award Auctions.’ We thank Kevin McCardle, Bob Nau, Bob Weber, Dennis Yao and an anonymous referee and the Editor for comments and gratefully acknowledge the Fuqua Business Associates Fund for support. §Fuqua School of Business, Duke University ¶Department of Economics, Stony Brook University.