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Do public sector contract catering tender procedures result in an auction for “lemons”?

Do public sector contract catering tender procedures result in an auction for “lemons”? Purpose – The purpose of this paper is to analyse the structural effects of public sector catering tender procedures and suggests improvements that would benefit clients, users and small catering firms. The essential problem is that current tender procedures have the effect of limiting clients' knowledge of possible quality and cost configurations. Thus clients are unable to reveal their preferences in tender specifications, and so bidders bid low prices and low quality. Design/methodology/approach – The approach is an analysis of current procedures using concepts from market structure and asymmetric information. Findings – The main finding is that low prices and low quality are the norm because information relating to price is more complete than information relating to quality, and because not all interested parties participate in the decision making. In addition, present procedures probably favour larger firms. Research limitations/implications – Cases of appropriate quality are not available for observation precisely because of the “lemons” problem: appropriate and better quality are driven from the market because of the nature of existing structures and procedures. Practical implications – The implications of the research are that procedures should be changed in order to provide incentives for both sides to release information regarding possible configurations and preferences. The most important recommendation is that the bidding process should be undertaken in two rounds. The first round would reveal possible quality/cost configurations while the second would determine the price, as in a standard sealed bid auction. Originality/value – The paper explores a problem that is of practical importance using economic theory often regarded as rather abstract. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Public Sector Management Emerald Publishing

Do public sector contract catering tender procedures result in an auction for “lemons”?

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References (28)

Publisher
Emerald Publishing
Copyright
Copyright © 2005 Emerald Group Publishing Limited. All rights reserved.
ISSN
0951-3558
DOI
10.1108/09513550510616724
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to analyse the structural effects of public sector catering tender procedures and suggests improvements that would benefit clients, users and small catering firms. The essential problem is that current tender procedures have the effect of limiting clients' knowledge of possible quality and cost configurations. Thus clients are unable to reveal their preferences in tender specifications, and so bidders bid low prices and low quality. Design/methodology/approach – The approach is an analysis of current procedures using concepts from market structure and asymmetric information. Findings – The main finding is that low prices and low quality are the norm because information relating to price is more complete than information relating to quality, and because not all interested parties participate in the decision making. In addition, present procedures probably favour larger firms. Research limitations/implications – Cases of appropriate quality are not available for observation precisely because of the “lemons” problem: appropriate and better quality are driven from the market because of the nature of existing structures and procedures. Practical implications – The implications of the research are that procedures should be changed in order to provide incentives for both sides to release information regarding possible configurations and preferences. The most important recommendation is that the bidding process should be undertaken in two rounds. The first round would reveal possible quality/cost configurations while the second would determine the price, as in a standard sealed bid auction. Originality/value – The paper explores a problem that is of practical importance using economic theory often regarded as rather abstract.

Journal

International Journal of Public Sector Management – Emerald Publishing

Published: Oct 1, 2005

Keywords: Catering industry; Contracting out; Information exchange; Compulsory competitive tendering

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