Anatomy of competition in public procurement

Purpose This paper aims to study the extent and determinants of competition, entry and the effect of competition on prices in public procurement using rich data from Finland. Design/methodology/approach This paper applies quantitative methods to analyze public procurement bidding data linked to firm register data in an auction theoretical framework. More than 17,000 invitations to tender in Finland in 2010–2017 are examined using both descriptive regression analysis and an instrumental variable (IV) design for the price effects. Findings Public procurement in all regions, types of contracting authority and most industries faces the problem of low competition. This is a concern, because prices are shown to decrease with competition, and the estimated price effect is larger in a low competition environment. Contract design is predictive of competition and firm characteristics such as experience and location can predict entry patterns among the potential bidders indicating entry costs. Social implications The lack of competition in public procurement is costly for taxpayers. Reducing entry costs should be the focus of policy design and policy efforts should be targeted to tenders where competition is expected to be low. Originality/value This paper uses large and rich data sets to study competition in public procurement of all sizes in all industries and for a wide range of contracting authorities. Novel entry analysis is facilitated by observing the potential bidders using registrations as proxy and linking these potential bidders to firm data. Registration data also facilitates the use of IVs strategy to study the effects of competition.