Strategic Pricing by Oligopolists in Public Tenders of Passenger Railway Services

Abstract

An important component in the deregulation of the public sector in the European Union is public procurement of services and products. This paper studies the bidding behavior of firms participating in public tenders of passenger railway services in Sweden. At a later stage in this research, the intention is to broaden the analysis to include the similar markets of Great Britain and Germany. A general assumption in the paper is that firms sometimes place very low bids and sometimes very high bids in tenders. In a theoretical part of the paper we discuss both these forms of strategic pricing, linked to a discussion on continuous and discontinuous economies of scale regarding costs of production. Detailed data on bids and bidders in Swedish tenders of railway services are then analyzed. About 30 tenders taking place between 1992 and 2003 are included, checking for cases of very low and high bids and other types of deviation within the data material. Among the early results, based upon this rather limited data set, we find that big firms like SJ and Connex tend to place either the lowest or the highest bid when participating in tenders. Connex’ bids generally deviate more from the average bid level than the bids from other firms. More data from Sweden and other countries is needed to make further analyses and hypothesis testing applicable. The scarcity of data is in itself an interesting result of the study, since it is caused by efforts of the procuring authorities to protect the “secrets” of the bidders. We argue that this is against the competition policy of the European Union and may harm the tendering process and industry development.