Setting Reserve Prices in Repeated Procurement Auctions

Abstract We use a large dataset of Russian public procurement auctions for standard gasoline over the period 2011–2013, to investigate how buyers set the reserve price – i.e. the buyer’s announced maximum willingness to pay for the good awarded. We provide empirical evidence that repeated prior contracts between a buyer and a supplier affect the reserve price set by this buyer in future auctions where the same supplier takes part and wins. Specifically, we find that in these auctions the reserve price, the level of competition, and the winning unit price are lower than in the average auction in the dataset. We conjecture that, in setting the reserve price for a new auction, public buyers exploit information gained about the winners of previous auctions. This intuition is supported by empirically studying the reserve price in a dynamic framework, which allows buyers to take into account information from previous procurement transactions with given suppliers. Finally, we show that our empirical results are in line with a simple theoretical setting in which the buyer collects information about one supplier’s costs and exploits this in setting the reserve price in future auctions.