The Benefits of Procurement Auctions: Competitive Pressure vs Selection of Efficient Suppliers

We study the effects of the procurement mode on the quantity of regional train services and the procurement price in Germany. We exploit a 1996 railway reform. A reduced-form analysis shows that using procurement auctions, rather than directly awarding the contracts to the incumbent, increased the service frequency by 12???16 per cent and decreased the procurement price of a train kilometre by 20???25 per cent. Adopting a structural auction framework, we confirm that auctions reduce prices (though only by 15???16 per cent). We also find that auctions substantially reduce markups, and select more efficient suppliers, thereby reducing costs.