Working Paper

Entry and competition effects in first-price auctions: theory and evidence from procurement auctions


Tong Li, Xiaoyong Zheng

Published Date

4 August 2006


Working Paper (CWP13/06)

Motivated by several interesting features of the highway mowing auction data from TexasDepartment of Transportation (TDoT), we propose a two-stage procurement auction model withendogenous entry and uncertain number of actual bidders. Our entry and bidding models provide several interesting implications. For the first time, we show that even within an independentprivate value paradigm, as the number of potential bidders increases, bidders equilibrium bidding behavior may become less aggressive because the entry effect is always positive and maydominate the negative competition effect. We also show that it is possible that the relationship between the expected winning bid and the number of potential bidders is non-monotonedecreasing as well. We then develop an empirical model of entry and bidding controlling forunobserved auction heterogeneity to analyze the data. The structural estimates are used toquantify the entry effect and the competition effect with regard to the individual bids andthe procurement cost, as well as the savings for the government with regard to the procurementcost when the entry cost is reduced.