JOSHUA GANS, PROFESSOR OF MANAGEMENT (INFORMATION ECONOMICS)
AT MELBOURNE BUSINESS SCHOOL UNIVERSITY OF MELBOURNE, MUSES ON ASPECTS OF
THE TENDER GAME. PROFESSOR GANS IS AN ACTIVE RESEARCHER ON COMPETITION AND
OUTSOURCING ISSUES USING THE TOOLS OF GAME THEORY.
Does the winner
really take it all?
M ANY TENDERS are set
up to invite bids with the idea
that the supplier offering the
lowest price will take it all.
That is, the winner will supply
the entire tender and reap any
profits from so doing.
Recently, however, it has been
suggested (AFR, 17th June,
2004, p.83) that the
Department of Defense, in
awarding ship assembly con-
tracts, may require winners to
subcontract part of the work
involved to losers.This devel-
opment moves beyond the
simple textbook bidding
process involved in tenders
and gives me pause to wonder
whether it was in our govern-
ment's interest.
To be sure, for larger con-
tracts, one must expect that
subcontracting by winners to
losers is not an uncommon
occurrence.While winners may
have costed all the resources
they need, the employees,
equipment and the like, would
probably only be contracted at
a later stage. Given that the
loser may have just lost sales, it
would not be surprising if they
had spare capacity and would
like to provide services to the
winner.This will especially be
the case if the winner might
otherwise have to expand
capacity themselves.
But think about what this pos-
sibility means for the bids sup-
pliers submit to the tender. If a
winner could expect to dictate
terms to a weakened loser,
then bids would probably be
submitted as in any winner-
take-all environment; just
enough to make taking on the
tender worthwhile.
But what if losers have some
power? Take the extreme
where a winner with insuffi-
cient capacity has to go 'cap in
hand' to a loser. In that case,
with the winner's back against
the wall, the loser might dic-
tate terms well above their
own costs. So, all of a sudden,
it might actually be better to
be the loser rather than the
winner.
Far from potential losers opt-
ing out of tenders, however,
what is more likely is the bid-
ders will take into account the
fact that some of their profit
line might be siphoned off to
losers. Moreover, they will also
take into account that losing
might not be so bad.Thus,
their bid would be watered
down on two fronts. For those
procuring, this is a poor out-
come indeed, as competition is
Recall, however, that losers,
who know that winners need
weakened and procurement them, will be given some
costs are much higher. power to dictate terms. In of
itself, this will diminish compet-
Let's now return to the sug-
itive outcomes. So what would
gestion that a winner might
happen is that we would lose
actually be required to subcon-
the benefits of competition
tract some work to a loser
now in the hope of preserving
even if they could handle it
them in the future. Strangely
themselves.The rationale
enough, there is a sense in
behind this is that in large con-
which potential bidders could-
tracts winners would also have
n't have hoped for a better
an advantage in winning future
outcome in their favour.
contracts. So to preserve com-
petition, one must preserve
capabilities.And to do this, * Details of Joshua Gans’
losers need to continue to be work are available at
in the game. www.economics.com.au.