Local Cost Synergies in Reverse Auctions: An Application to Road Salt Procurement

Each winter, Minnesota’s Department of Transportation purchases nearly a quarter-million tons of road salt through competitive auctions. In Local Cost Synergies in Reverse Auctions: An Application to Road Salt Procurement (Gupta, Schmitt, and Stamatopoulos), the authors show that large firms benefit from “local cost synergies” when they win clusters of nearby depots. Because these synergies reduce costs, large firms are able to bid about 9% lower, on average, than they would otherwise. This cost advantage sharply reduces the probability that small firms will win contracts and leads simultaneous auctions to allocate depots less efficiently than possible. The authors conclude that any rigorous examination of procurement auctions must explicitly account for local cost synergies; ignoring them risks producing misleading results.