Split-Award Procurement Auctions with Uncertain Scale Economies: Theory and Data

Abstract

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 occurs only when it minimizes total costs; sole-source outcomes, however, occur too often 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.