Division in Lots and Competition in Procurement
HANDBOOK OF PROCUREMENT, Nicola Dimitri, Gustavo Piga, Giancarlo Spagnolo, eds., Cambridge University Press, 2006
25 Pages Posted: 20 Apr 2006
Division in lots is one of the procurer's most crucial decisions. The number and the size of lots directly influences competition in the tendering process and thereby the procurer's budget and the quality of supply. This paper focuses on the effects the division of procurements into multiple lots has on competition in the short and in the long run. Short-run competition is affected mainly through two channels: the number of participants and the participants' behaviour. Both depend on market structure and procurement design. We discuss the relationship between the number of lots, participation, competition, and potential collusion in competitive procurement, and propose two simple indices that allow to evaluate how competition responds to an increase of the number of lots. Competition in a single competitive tendering process (static competition) determines the outcome in terms of price and quality today. The level of market competition in the long run, however, is not so obviously related to the static one. In certain sectors, maximizing competition in the short-run might have negative effects on the level of competition in the long run. We discuss how current procurement design may affect entry and exit of firms over time, and thereby the number of participants to future procurements. We show that sometimes strong competition today may imply weak competition tomorrow.
Keywords: Procurement, lots, competition indeces
JEL Classification: H57, D44, L41, K21
Suggested Citation: Suggested Citation