Fostering Participation in Competitive Procurement

A seminal result in the theory of competitive bidding holds that the buyer can lower the expected awarding price of a procurement contract by setting a reserve price below her opportunity cost for realizing the project. In this paper, we first provide a non-technical explanation for this result, then review how the "optimal reserve price" varies with the degree of interdependence among suppliers' production costs and the risk of collusion in the procurement market. The paper also discusses how the buyer can foster the participation of new entrants or Small and Medium Enterprises in the procurement market