Price-quality trade-off in procurement auctions with an uncertain quality threshold

Abstract Procuring high-quality goods at reasonable prices is a critical public sector concern. Yet, procurers often do not advertise clear weighting rules for price and quality but set a flexible quality threshold upon participation. This paper studies endogenous entry and bidding behavior in such procurement auctions. Using unique data on pharmaceutical procurement in Guangdong, China, we find that a high-quality index acts as a signal of high production costs. We also observe that high-quality bidders are more likely to withdraw from bidding because of their prior commitment to quality. The procurers who use quality indicators in price auctions need a carefully considered quality threshold. Our results have important implications for price-quality trade-offs in procurements that have uncertain quality thresholds.