Competition and Prices in USDA Commodity Procurement

Abstract

We evaluate United States Department of Agriculture (USDA) food procurement auctions. The Department spends nearly $1 billion a year for products for domestic feeding programs, such as the National School Lunch Program, and another $2.5 billion for international food programs. USDA's purchasing relies primarily on auction mechanisms designed to induce "hard" manufacturer price competition. We compare private-sector prices to low bids in 25,000 auctions, and find that typical private-sector prices substantially exceed USDA low bids for comparable products. We also assess the effects of competition on low bids. Low bids fall as the number of bidders increases, and the effects are nonlinear. Additional bidders have a very small effect on prices when there are already five or six bidders, but a stronger effect in markets with only one or two bidders. Even in this highly transparent bidding environment, competition matters.

Does e-procurement save the state money?

“…This occurs in timber auctions with N ≥ 5, in bond auctions with N ≥ 6, in oil auctions with N ≥ 8, and so on. Analyzing 25,000 auctions for commodities, MacDonald, Handy and Plato (2002) find that the price reduction due to more bidders is significant up to N = 6.…”

Market Power in Poultry Production Contracting? Evidence from a Farm Survey

“…The Merger Guidelines issued by the Department of Justice embody a nonlinear relationship, based on the Cournot model, when they rely on a Herfindahl index of concentration to identify mergers likely to raise competitive concerns. Empirical studies that test for nonlinearity (MacDonald, Handy, and Plato, 2002;Weiss, 1989) frequently find that the effects vary with the number of players within markets that are quite concentrated.…”

Price Determination in Public Procurement: A Game Theory Approach

“…Li and Zheng (2009), who in the model analysed a negative relationship between the number of bids and the price (competitive effect) and also examined an effect that is related to the cost of entry into the market and has the opposite direction (entry effect). Empirical research on data from the auctioning of food purchased by US Department of Agriculture shows decline of the lowest bid of 4,2 to 8,3 % depending on commodity between auctions with one and two participants; the effect is weaker with additional participants (MacDonald, Handy, Plato, 2002). Onur, Ozcan and Tas (2012) report in the study of data on public contracts awarded in Turkey in 2004-2006 that presence of another tenderer causes the contract price decline by about 3,9 % relatively to estimated value of public contract.…”