Economies of scale versus the costs of bundling: Evidence from procurements of highway pavement replacement

Abstract

Although most public procurements involve decisions concerning bundling, only a limited body of empirical research guides policy on this matter. In this paper, we examine the cost effects of bundling in the competitive tendering of highway pavement replacement with hot-mix asphalt. For this we use linear regression on data from a comprehensive sample of such contracts procured by the Swedish infrastructure manager (IM) during the 2012–2015 period. We find that bundling affects the procurer’s cost in multiple and partly counteracting ways. Our results show that economies of scale are strong but diminishing and counteracted by the costs of bundling and bundling-related factors. Overall, the findings support the Swedish IM’s current bundle design but also suggest that most of the contracts are still inefficiently small. While not perfectly generalizable to other markets, the findings provide some support for the increased promotion and use of the bundling of small-scale road rehabilitation projects in the USA. Two main implications of the results are that bundling policy should emphasize proximity and similarity rather than whether the work is small in scale and that the scope for efficient bundling should be accounted for when optimizing the timing of pavement replacement.