James J. Anton, Sandro Brusco and Giuseppe Lopomo
Games and Economic Behavior Vol 69(1): 24-41, May 2010
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 splitaward 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 occurs only when it
minimizes total costs; sole-source outcomes ,however, occur toooften from an efficiency viewpoint. With respect
to prices, equilibrium bids involve pooling at a common price for the split award, and separation for sole-source
awards. The pooling region reduces bidding pressure and allows for relatively high sole-source prices. 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. We assess the predictions of the model and an extension with data on submitted `step-ladder' bid
prices for a US defense split-award procurement.
JEL Codes: C72, D44, D82, L13