Sealed bid auctions: an application to the building industry

Abstract

This paper examines some of the theory and practice of competitive tendering in the building iildustry. Allocation of building contracts by means of competitive tendering is one type of sealed bid auction. T\vo main strands of the theory of sealed bid auctions are developed. The first strarul identifies optimal mark-up given that each tender competition occurs in isolution. The second strand treats explicitly the sequential nature of tendering and resource constraints of tenderers. It emerges that the first strand is a special case of the second. A simple optimal bid price rule is identijed, which indicates that bid price for any one contractor will be affected by theresources availuble to the contractor and general market conditions. It is shown that bid prices will be more competitive the better the information available to tenderers, the more carefully is the tender list constructed and the greater the number of firms invited to tender. It is further shown, however, that little is gained by having more...