Competitive Bidding And The Price Mechanism
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This chapter discusses some of the implications of sealed bidding, or tendering, for the theory of price. It attempts to build a bridge between conventional microeconomic theory and some of the work by operations researchers on competitive bidding. The bidding conditions created by the secret tendering system are analogous to those created at an auction by the Dutch bidding procedure. To determine the optimal profit addition, the tenderer will have to make some judgements regarding the number of contracts that can be captured at different profit margins. It was suggested that the analysis of bidding behaviour provided in this chapter might be applicable to markets in addition to those which use explicit bidding or tendering procedures. An implication of the analysis, in terms of the alternative interpretation, is that the competitive market processes may have equilibrium characteristics of the 'statistical' kind which emerge in competitive bidding for contracts, or else no well-defined equilibrium characteristics at all.