Do public sector contract catering tender procedures result in an auction for “lemons”?

Abstract

PurposeThe purpose of this paper is to analyse the structural effects of public sector catering tender procedures and suggests improvements that would benefit clients, users and small catering firms. The essential problem is that current tender procedures have the effect of limiting clients' knowledge of possible quality and cost configurations. Thus clients are unable to reveal their preferences in tender specifications, and so bidders bid low prices and low quality.Design/methodology/approachThe approach is an analysis of current procedures using concepts from market structure and asymmetric information.FindingsThe main finding is that low prices and low quality are the norm because information relating to price is more complete than information relating to quality, and because not all interested parties participate in the decision making. In addition, present procedures probably favour larger firms.Research limitations/implicationsCases of appropriate quality are not available for observation precisely because of the “lemons” problem: appropriate and better quality are driven from the market because of the nature of existing structures and procedures.Practical implicationsThe implications of the research are that procedures should be changed in order to provide incentives for both sides to release information regarding possible configurations and preferences. The most important recommendation is that the bidding process should be undertaken in two rounds. The first round would reveal possible quality/cost configurations while the second would determine the price, as in a standard sealed bid auction.Originality/valueThe paper explores a problem that is of practical importance using economic theory often regarded as rather abstract.