Showing papers on "Bidding published in 1977"

A Bidding Model of Perfect Competition

Abstract: I demonstrate in this paper that price formation via the procedure of competitive bidding satisfies a version of the law of large numbers, in both the probabilistic sense and the economic sense. That is, if in a sealed-tender auction a seller offers to sell at the highest bid an item having a definite but unknown monetary value, and each of many bidders submits a bid based only on his private sample information about the value, where the bidders' samples are independent and identically distributed conditional on the value, then the maximum bid is almost surely equal to the true value. Thus, no bidder knows the true value of the item, yet it is essentially certain that the seller will receive that value as the sale price. Certain regularity assumptions are needed to prove this proposition. I present three examples, two for which the result is valid and another for which it is not.

The Principle of Unanimity and Voluntary Consent in Social Choice

Abstract: A discrete version of the author's incentive-compatible Auction Mechanism for public goods is applied to the problem of social choice (voting) among distinct mutually exclusive alternatives. This Auction Election is a bidding mechanism characterized by (1) unanimity, (2) provision for the voluntary compensation of voters harmed by a winning proposition, and (3) incentives for "reasonable" bidding by excluding members of a collective from maximal increase in benefit if they fail to agree on the proposition with largest surplus. Four of five experiments with six voters, bidding privacy, monetary rewards, and cyclical majority rule structure choose the best of three propositions.

Competitive Bidding and the Production of Precontract Information

Abstract: This note is concerned with the effects of contractual complexity on the precontract bidding process. Competitive bidding is seen to be a heterogeneous class of devices for transmitting information between organizations. Even for rather simple contracts (e.g., Demsetz' license plates contract), the purchaser is seldom interested solely in price -- he is interested in acquiring and providing information as well. For complex contracts, such as a fifteen-year cable television franchise, the information problems tend to dominate. The implications of locating the liability for provision of precontract information on providers and on purchasers are considered.

Bidding Models: Effects of Bidders' Risk Aversion

Abstract: A revised optimum bidding model is presented which corrects the omission, in previous models, of the way contractors behave when confronting risk. Specifically, the model proposes to use a nonlinear function of profit to reflect the bidders aversion to risk. The need to use such a utility function is demonstrated through the analysis of over 4,400 bids on 858 public projects in Massachusetts during the 1966/75 decade. This evidence indicates that contractors behave differently when dealing with small and large projects, and when operating in good years or bad. They appear most risk averse toward larger projects in lean years, and bid relatively lower. This consideration can be incorporated into the standard bidding models by the simple devise of measuring the utility function of a bidder for a particular project, and inserting it as the measure of value in the formulas that determine the optimum bid.

Bidding in Simultaneous Auctions with a Constraint on Exposure

Abstract: We consider the problem of determining a profit maximizing set of sealed bids in simultaneous auctions that are independent except for a restriction on the total of all bids. Although the objective function is not concave, we show that a Lagrangian approach will often yield an optimal answer and, when it does not, will yield a good solution and a bound on possible further improvements. Characteristics of optimal sets of bids are proven. The methodology employed will be generally attractive for any problem that involves allocating a single resource among a large number of competing activities with convex-concave profit functions.

Pre-Estimate Cash Flow Analysis

Abstract: A technique is developed for modeling the cash flow of a construction project. Alternative methods of specifying cost and earnings flows allow great flexibility in modeling a variety of project and contractual conditions. The net interest, cost, and present worth associated with a given cash flow is calculated. A linear unbalancing rule is used to model the effect on cash flow of early payments. This information is valuable when deciding whether or not to bid a given project, and as a method of estimating the interest cost and net worth associated with a given project schedule and bidding strategy. A computer program for a minicomputer was developed to reduce the effort necessary for using this model, and to allow reader participation during the stages of analysis. /Author/

Uncertainty and the Bidding for Incentive Contracts

Abstract: In many procurement contracts, the monetary reward for the winning bidder is a function of the bid and of theex postproduction cost. Therefore contract incentives can affect the strategic relationship between a firm’s bid and its estimates of production expenses. In the existing literature on incentive contract bidding, the effects of contract incentives on a firm’s bidding strategy are analyzed with the assumption that expectations about rival bids are exogenous. That is, these expectations are summarized by a probability distribution that is assumed to be unchanged as incentives and other structural parameters are changed. But any factor that would alter one bidder’s strategy would presumably alter rivals’ bidding strategies as well, thereby changing the observed distribution of rival bids.

Incentive Contracting for National Defense: A Problem of Optimal Risk Sharing

Abstract: This paper analyzes risk sharing in defense contracting within an insurance framework with moral hazard present. The positive model specifies conditions under which risk sharing between the firm and the government can be expected to occur, and identifies the important exogenous characteristics of the firm that determine the equilibrium set of contract terms. An important public policy implication is derived from a normative comparison between the simple incentive structure currently used in defense contracting and a modified contingent claims arrangement. The latter is shown to be superior in providing desirable risk sharing, while also maintaining appropriate marginal incentives for cost control. 1. Introduction * Contracting for national defense has accounted for over half of the total annual defense budget since the early 1960s. The goods supplied by private industry to satisfy the public demand for national defense are generally characterized by an advanced technology fraught with uncertainty, prone to rapid obsolescence, and having extremely large capital requirements. Furthermore, the demand for these goods fluctuates markedly, and is determined by a single buyer, the federal government. These characteristics tend to preclude the development of traditionally conceived markets, and have given rise to an alternative-the bilateral procurement contract. This contractual arrangement stipulates the terms of exchange between the government and a private firm, and also serves as a mechanism for risk sharing between the two parties. The procurement of major weapons systems and their component parts takes place almost exclusively through bilaterally negotiated contracts, rather than through a competitive bidding mechanism (which is generally used only for the procurement of ready-made items). Furthermore, the competition that does exist between firms vying for major defense contracts is principally along the lines of technical design, with true cost considerations playing a relatively minor role in contract awards. The lack of significant price competition creates a strong potential for monopoly profits to be earned in

An Analysis of Competitive Bidding on BART Contracts

Abstract: The purpose of this study is to analyze the competitive bidding on the heavy construction projects of the San Francisco Bay Area Rapid Transit (BART) District. We develop an analytic model that is appropriate to the study of the BART bidding experience and use it to derive a number of propositions concerning the bidding behavior of the participating contractors. Given that we have data pertaining to 77 BART construction projects, we are in the position of being able to test statistically many of the propositions we derive. There are at least two reasons which prompted us to undertake this study. First, because of a lack of data, the empirical study of bidding environments has lagged the development of theoretical bidding models. Not only will our study help to remedy this situation, but it also serves to isolate data requirements for future empirical studies. Second, the theoretical treatment of bidding problems has tended to focus on developing strategies to be followed by the individual bidders; little attention has been given to the problems faced by the procuring agency itself. Our study identifies certain variables that affect the outcome of the bidding process and in this regard provides the agency with information as to how to control the bidding environment. The paper is organized as follows: In Section II, the BART bidding environment is described. In Section III, an analytic model of bidding behavior relevant to the BART bidding experience is developed. Using this model, we derive a number of propositions concerning the contractors. In Section IV, we discuss the nature of the data base used in our empirical tests. Then in Section V, we describe the empirical model used and present the results of our tests. Finally, in Section VI we summarize the findings of our study.

The impact of designated market makers on security prices

Abstract: This paper is divided into two distinct parts. Part I, Empirical Evidence, tests a previously formulated variance, thinness relationship for security returns. First quarter 1972 daily returns variance is regressed on market value of shares, share price, trading activity, sales variance, and institutional holdings for 178 firms selected by stratified random sampling from AMEX and NYSE (specialist exchanges), and from Tokyo and Rio de Janeiro (non-specialist exchanges). The principal finding is that returns variance and market value are inversely related on non-specialist exchanges, but not on specialist exchanges; this difference is attributed to specialists' impact. Part II, Policy Proposals, discusses the manner in which designated market makers may be effectively incorporated into a continuous auction exchange. Issues discussed include: desirability of price stabilization, transfers implicit in the existing U.S. specialist system, consolidation and public availability of the limit order book, number of designated market makers for a security, competitive bidding, and compensation for performing the price stabilization function. Stabilization is modeled as an external economy, and specific policy proposals for internalizing it are advanced.

The Probability of Being the Lowest Bidder

Abstract: In a closed auction it is often possible by examination of past data to estimate the probability p of bidding lower than a single competitor. to estimate the probability of bidding lower than all competitors two different formulae have been suggested, each based on the value of p. In this paper a simple model of a bidding process is formulated and the efficacy of these formulae is tested.

Paying the price for construction risk

Abstract: The amount that a contractor charges an owner is the expected cost of performing the work plus a price for accepting the risk plus a markup. The prices that different contractors should charge to accept risk depend upon their financial situations. The relative values of different sums of money to contractors and owners are modeled by utility curves, and the prices that contractors with different finances should charge are computed from these curves. The effects of these varying financial conditions upon the competitive bidding process are analyzed. The owner may be charged more by a contractor to carry risk than it is worth. A contractor in such financial difficulty that he is willing to gamble on a risky job to recover has a bidding advantage over a more financially stable contractor.

Theory for Competitive Bidding

Abstract: A computer implementable bidding strategy model based on numerical integration is presented and its implications analyzed in a hypothetical competitive environment. Comparisons among data from several empirical bidding studies are made to support the potential usefulness of similar models.

A Referee's Report

Abstract: Thank you for giving me the opportunity to review the author's paper on sealed bidding using chance-constrained programming. I also had a knowledgeable colleague. Mr. R. V. Clapp, look at the paper so that what I give you will be the consensus of our reviews. You may tell the authors anything which I tell you. This actual referee's report is published as an object lesson: good intentions and an algorithm do not necessarily make an application.

Impact of Farm Size on the Bidding Potential for Agricultural Land: Comment

Abstract: In a recent issue of this Journal, Harris and Nehring (H-N) present a theoretical model of the maximum bid price for agricultural land and an application of the model to cash-grain farms in Iowa. This comment identifies a numerical error in their work, which, when corrected, reveals a conceptual flaw in their model. A revised model is formulated and its application is illustrated using the H-N data.

The oil game: Man-machine simulation of competitive bidding

Abstract: The Oil Game models the environment of competitive bidding for offshore oil and gas tracts. It utilizes the capabilities for man/machine interaction of the Laboratory at Berkeley; its objective is to study the economic consequences of having the government set alternative leasing policies. Policies which are readily simulated include royalty vs. lump sum ("bonus") bidding; prohibition or encouragement of bidding syndicates; public vs. private information provision, and other alternative policies which have attracted government and industry attention here and abroad. By observing a large number of outcomes of the game, implications of alternative oil leasing policies can be derived for environments whose complexity effectively precludes analytical solution.

A DISCRETE-TIME NONLINEAR (m + n)-PERSON LABOR MARKET SYSTEM WITH UNCERTAINTY

Abstract: Publisher Summary This chapter discusses a discrete-time nonlinear ( m + n )-person labor market system with uncertainty. It discusses two important questions in economics. First, given a labor market with n labor applicants and m employers with incomplete information on the behavior of directly competing individuals and wage setting through a wage bidding process in which bids and offers are based on expectations, will each participant be able to select an optimal solution to each of the three resulting decisions? Second, will there exist such labor markets which have possible equilibria which imply the existence of persistent unemployment and no adjustment of the wages being paid? The chapter presents a mathematical model of an interactive labor market with n labor applicants and m employers and the relevant structure for the triple decision process for each participant. It is demonstrated that for each labor applicant in the defined model, there is an optimal solution to the decision problems of selecting wage and job offers under uncertainty or without uncertainty, selecting the level of output that will maximize profits at the market determined level of employment and selecting revised expectations.

Anti-competitive patterns of joint bidding for offshore petroleum leases / BEBR No. 444

Abstract: This paper develops a model of joint venture formation and performance in the offshore petroleum leasing market. The model is designed to explain the behavior of firms acting on the incentive to circumvent competition via cooperative action. The analysis focuses on strategic differences between admitting small versus large firms to a joint venture group, the (in) feasibility of alternative distributions of profits among the venture partners, and the competitive impact of the joint venture on the outcome of the lease sale.