Impact of Number of Bidders on Competition

Abstract

A contractor seeking the highest expected value from each competitive bid will lower the markup, as the number of competitors increases. The contractor's competitors can be expected to do likewise, and their adjustments affect the contractor's expected value. Thus, the number of competitors affects a contractor's profit twofold. The sheer number of competitors dilutes the probability of winning, and competitors' adjustments of their markups undercut his own markup. Competitors' estimated adjustments are easily included in a bidding analysis based on a modified general bidding model or on Gates' model. Friedman's model is not compatible with adjustments by competitors. There is a natural equilibrium among competitors based on their relative costs. A contractor with lower costs will bid a higher markup but still a lower bid than competitors. But it is not to the contractor's advantage to undercut the opposition further. Coupled with the relative insensitivity of expected value to markup, this leads to stability in the competitive bidding process. The interaction within a market, the estimating of competitors' adjustments, and the impact of the number of bidders are demonstrated for the different models.