Creating a More Competitive PPP Procurement Market: Game Theoretical Analysis

Abstract

© 2016 American Society of Civil Engineers.Because of the extensive time frames and the transfer of risk toward the contractor, there is a large value at stake in public-private partnerships (PPP). The complexity and the high bidding cost are open sesames for inexperienced contractors to refrain from the opportunity. On the one hand, this study builds a game-theoretic bidding model that represents the key peculiarities of the PPP competitive tender. Besides a markup decision, the contractors also take an investment decision reflecting the bid preparation efforts. On the other hand, the impact of governmental competition-enhancing policies on the theoretical bidding outcome is investigated. The bidder's competitive position and the project's risk are important determinants. While substantial investments could be expected in two-player settings, price competition is moderate. In three-player scenarios, immature players withdraw from participating in high-risk tenders. Nevertheless, the computer experiments reveal that this oligopolistic situation might be overcome by compensating the losing bidders for their research efforts. The triangulation with views from practitioners supports that this incentive creation mechanism is necessary to stir up the contractor's enthusiasm in the market.