The simple economics of bid criteria

Abstract

Bid criteria are of prime importance to bidders because they are the basis for the bidders to select bid price or bid mark-up. This article presents the alternative expressions of the bid criteria of the conditional negative and positive profit ratios proposed by Seydel and Olson (1990) and Lai et al. (2002), respectively, and interprets them in the traditional demand and supply theory. It is found that there is a ‘frontier’ bid mark-up if the bidders adopt the conditional profit ratio as their sole bid criterion.

Acknowledgements

This research was supported by the Foundation for the Author of National Excellent Doctoral Dissertation of P.R. China (200159), NSFC (70571014) and CPSF (200919).

Notes

¹The basic idea of Bulow and Roberts (1989) is as follows. With x and 1 − F(x) ≡ q servicing as the ‘price axis’ and the ‘quantity axis’, respectively, for each bidder, 1 − F(x) is viewed as the demand function. Then, multiplying ‘quantity’, q = 1 − F(x), by ‘price’, x = F ^–1(1 − q), we have the total revenue of qF ⁻¹(1 − q). By taking its derivative with respect to ‘quantity’, the marginal revenue is MR(x) = x − (1 − F(x))/f(x). In addition, the optimal auction maximizing the seller's expected revenue in Myerson (1981) is to award the project to the bidder with the highest marginal revenue MR ₁(x) at a price determined by MR ₁ ⁻¹(M₂ ), where M ₂ is the second-highest marginal revenue.