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Sourcing from the Enemy: Horizontal Subcontracting in Highway Procurement

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  • Justin Marion

Abstract

type="main"> I empirically consider the effect of horizontal subcontracting on firm bidding strategies in California highway construction auctions. Subcontractors are hired by prime contractors prior to the auction, and the subcontractor may also be a competitor in the primary auction. While horizontal subcontracting may improve productive efficiency, it softens the horizontal subcontractor's bid strategy, since winning the auction may entail losing subcontracting business. I find that while each additional competitor supplied by the firm is estimated to increase its bid by 1.4 per cent, the winning bid is uncorrelated with horizontal subcontracting. This points toward an efficiency motive for cross-supply.

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  • Justin Marion, 2015. "Sourcing from the Enemy: Horizontal Subcontracting in Highway Procurement," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 100-128, March.
    • Handle: RePEc:bla:jindec:v:63:y:2015:i:1:p:100-128
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    2. Muthers, Johannes & Hunold, Matthias, 2017. "Capacity constrained price competition with transportation costs," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168248, Verein für Socialpolitik / German Economic Association.
    3. BOUCKAERT, Jan & VAN MOER, Geert, 2022. "When rivals team up in procurement: does it distort competition?," Working Papers 2022001, University of Antwerp, Faculty of Business and Economics.
    4. Hunold, Matthias & Muthers, Johannes, 2018. "Spatial Competition with Capacity Constraints and Subcontracting," DICE Discussion Papers 254, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE), revised 2018.
    5. De Silva, Dakshina G. & Kosmopoulou, Georgia & Lamarche, Carlos, 2017. "Subcontracting and the survival of plants in the road construction industry: A panel quantile regression analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 113-131.
    6. Bouckaert, Jan & Van Moer, Geert, 2021. "Joint bidding and horizontal subcontracting," International Journal of Industrial Organization, Elsevier, vol. 76(C).
    7. Xu, Jiayan & Feng, Yinbo & He, Wen, 2017. "Procurement auctions with ex post cooperation between capacity constrained bidders," European Journal of Operational Research, Elsevier, vol. 260(3), pages 1164-1174.
    8. Peter J. Buckley & Michael Murphree & John Anderson, 2024. "Horizontal subcontracting and the global factory," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 55(7), pages 934-944, September.
    9. Hunold, Matthias & Muthers, Johannes, 2019. "Spatial competition and price discrimination with capacity constraints," International Journal of Industrial Organization, Elsevier, vol. 67(C).
    10. Bouckaert, Jan & Van Moer, Geert, 2017. "Horizontal subcontracting and investment in idle dispatchable power plants," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 307-332.
    11. Gu, Chaocheng & Wei, Juan & Wei, Ying, 2021. "Sourcing under competition: The implications of supplier capital constraint and supply chain co-opetition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 149(C).
    12. Sijing Deng & Jiayan Xu, 2020. "Ex ante and Ex post Subcontracting between Two Competing Bidders," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 37(01), pages 1-22, January.
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    14. B. Cesi & M. Lorusso, 2020. "Collusion in public procurement: the role of subcontracting," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 37(1), pages 251-265, April.

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