A STUDY OF FORMALLY ADVERTISED PROCUREMENT
Abstract
As a method of procuring goods and services, formally advertised procurement offers a number of advantages. These include the prevention of fraud and favoritism, and the provision of equal opportunity to all prospective suppliers. Used indiscriminately, however, the process may result in prices higher than those desirable and obtainable. This study points out how this may occur, with emphasis on the problems associated with noncompetitive underlying market structures and too few bidders. More specifically, the study indicates that four or fewer bidders may be considered too few, and almost two-thirds of all contracts are let in these cases. This is done by examining over 2,300 contracts let under formal advertising procedures. A measure of price dispersion is regressed against the number of bidders, the cost of the item, and the size of the firm. It is found that the greater the number of bidders, the greater the price dispersion. Even with too few bidders, valuable price information may be generated by use of the bidding procedure. This likelihood, in conjunction with the manifest virtues of the bidding process, leads to several suggestions that would enable the process to yield even better results than currently obtained, while avoiding the undesirable features of the process. These suggestions include a more formal method of determining which products the process should be used for, and a means whereby postbid negotiations may be utilized to take advantage of price information without committing the purchaser to what may be a too-costly contract.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jun 01, 1966
- Accession Number
- AD0637461
Entities
People
- Robert M. Paulson
- Sidney S. Handel
Organizations
- RAND Corporation