Coordination in Split-Award Auctions with Uncertain Scale Economies: Theory and Data

In a number of observed procurements, the buyer has employed an auction format that allows for a split-award outcome. We focus on settings where the range of uncertainty regarding scale economies is large and, depending on cost realizations, the efficient allocations include splitaward outcomes as well as sole-source outcomes (one active supplier). We examine the price performance and efficiency properties of split-award auctions in relation to equilibrium bidding under asymmetric information. In equilibrium, both award outcomes occur: the split-award outcome occurs only when it minimizes total costs; sole-source outcomes, however, occur too often from an efficiency viewpoint. With respect to prices, equilibrium bids involve pooling at a common price for the split award, and separation for sole-source awards. The pooling region reduces bidding pressure and allows for relatively high sole-source prices. We provide conditions under which the buyer and suppliers all benefit from a split-award format relative to a winnertake-all unit auction format. Our results are consistent with data on US defense procurement auctions. ∗This paper supercedes ‘Equilibrium Bids and Scale Economies in Split—Award Auctions’ by James Anton. We thank Kevin McCardle, Bob Nau, Bob Weber and Dennis Yao for copmments and gratefully acknowledge the Fuqua Business Associates Fund for support. §Fuqua School of Business, Duke University ¶Department of Economics, State University of New York at Stony Brook, and Dipartamento di Scienze Economiche, Aziendali e Statistiche, Universita Statale di Milano.