A half-dozen firms are competing to secure a highway contract from a local government via sealed bid. When bids are opened, the winning firm’s bid is 40 percent below the next-lowest bid.
a. How might you explain such a low bid? Given such a bid, what risks does the winning bidder face? Explain.
b. Is such a low bid unambiguously “good” for the local government? What potential risk does the government face? (In terms of the auctioning party’s risk, how does a procurement differ from an auction sale?) How might the government protect itself from this risk?