Local Cost Synergies in Reverse Auctions: An Application to Road Salt Procurement

In many simultaneous auction settings, such as government procurement auctions, there may be linkages across items, in that the value a bidder places on one item depends on whether the same bidder also wins others. Applying this idea to auctions run by Minnesota’s Department of Transportation (MnDOT), we show how firms’ observed bidding behavior can reveal the existence and magnitude of such cross-auction linkages. MnDOT holds auctions annually to procure road salt for each of its depots (storage facilities) across the state. Our empirical results indicate substantial local cost synergies: large firms’ bids reflect a strong preference for winning colocated depots. We estimate that, on average, large firms’ bids are about 9% lower than they would be absent these synergies. Further, we show that local cost synergies substantially undermine small-firm competitiveness and make it efficient to nearly always assign entire geographic areas to a single large firm.

Supplemental Material: All supplemental materials, including the code, data, and files required to reproduce the results, are available at https://doi.org/10.1287/opre.2023.0337.