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### Abstract

Bidding competition plays an important role in price discovery and the determination of suppliers in international grains. In this paper we analyze international bidding competition for wheat for a specific importer. Tender data over the period 1993-1999 were analyzed and bid functions estimated by class of wheat (hard red spring, hard amber durum, and hard red winter denoted as HRS, HAD, and HRW, respectively) and by selling firm. A stochastic simulation model was developed to determine the optimal bid and to analyze factors affecting bidding behavior and competition. The tender data indicated there was a surprisingly wide range of bids. Variation of bids across firms submitted for individual HRS tenders had standard deviations that ranged from $5/mt or less in a number of tenders to as high as$22/mt. Tenders for HAD show similar variability. Tenders for HRW showed higher variability yet with standard deviations of bids between $30 and$40/mt. These results show much greater variability than is normally ascribed to competition among international grain sellers. The spread between participants' bids and cost indicators ranged widely across firms. Optimal bids and expected payoffs were derived for a prototypical bidder competing against the existing incumbents. Using this as a base case, we analyzed the impacts of the number of competitors, information, and cost differentials. In each case, we quantified the likely impact on optimal bids and expected payoffs. In addition, there were three particularly interesting extensions from conventional auction models that were examined. One was the impact of the option to the seller of supplying wheat from Canadian origins. Effects of Canadian offers in bid functions were not statistically different from U.S. origins. The effect however, was interpreted as an increase in the number of random bidders within a tender. The effect of this was to reduce optimal bids for HRS by \$0.50/mt. This suggests that the effect of Canadian origin as an option is minimal when the Canadian Wheat Board (CWB) sells through accredited exporters. The second interesting effect was that of correlated bids. Results indicated a high degree of correlation among bidders which had the effect of increasing the probability of winning, optimal bids, and expected profits. Finally, we explored the prospective impacts of the winner's curse on optimal bids. Results suggest that in light of the winner's curse, bidders should raise their bids; in the case of HRS, from a high of 1.9% to 7.7% to correct for bias in value estimation, to a low of 0.2% to 3.1% when considering money left on the table. These results have a number of implications. The simulations improve our understanding of a very important mechanism of procurement and competition in international grain trading. For buyers, tendering is useful particularly if there is temporal variability in costs and they vary across supply firms, if the number of bidders is large, and if information about bidders is transparent and bidders' offers are less correlated. Finally, for sellers, auctions can result in intense competition among participants. Being low cost is essential to success in this form of competition. Sellers that are not low cost should avoid auctions to be successful, and bidders should make adjustments to their bids to account for the winner's curse.