Karam Kang: It looks like there’s not much of a competition. But we find that you don’t have to worry too much about it in the sense that we are looking at why there’s little competition. And the main key reasons are, number one, contracting agencies can design contracts to lower the price, even with a single bidder via negotiation. And second, sellers are relatively homogeneous, conditioned on observed project attributes. So what we found pretty interesting here is that administrative hurdles, so called red tape, and corruption appeared to play very limited roles.
Tom Temin: Well, that is good news. And let’s back up to the beginning here, then. And what were you trying to look at, and tell us briefly the methodology by which you came to these conclusions?
Karam Kang: So we looked at what determines the level of competition among vendors for their procurement contracts, focusing on IT and telecommunications contracts. I have to say that our findings might be limited to these contracts. And the methodology here is that we consider a model of negotiation and choosing how much competition to have from the contracting officers point of view. And then we solve for equilibrium in such setting and then match that to the data, and then estimate the parameters of the model. I guess, the problem the it’s not that easy to explain the methodology.
Tom Temin: Yes, you’ve got 86 pages of research here, and a lot of them are covered with very complex equations. But basically, your data source was the Federal Procurement Data System.
Karam Kang: Yes.
Tom Temin: Okay. And do you have a rough idea of the value annually of the procurements that you did look at, that is the IT and telecom?
Karam Kang: Yeah, so we looked at around 7,000 contracts, costing the government about $2.5 billion, that’s the period of 2004 to 2015.
Tom Temin: Okay, and so the same procurement laws were pretty stable throughout that period, so they were following the kind of the same methodologies. And discuss the level of how many of these solicitations resulted in competition, and those that were not competitive or sole source — what were the reasonings behind there? Paint us a picture here.
Karam Kang: Yes. So lack of competition can be explained by many reasons. Number one, it could be that government has regulations, so it should be only one vendor should do it. For example, because of international agreements, things like that. It could also be that contracting officers decide that patent or copyright issues, you should only do one person. At the point, though, you may wonder why contracting officer decides they have to use patented product as opposed to non-patented products. And also third reason for lack of competition, or a lot of competition, is a set aside for small businesses. We do find that for small businesses, once they have a lot of competition, because large companies cannot participate, that seems to increase competition among small businesses. Aside from these three reasons, default is full and open competition. But interesting thing is that even for the full and open competition, we see that median number of bids is two.
Tom Temin: Yeah, so even when they say, come one come all, the vendors don’t.
Karam Kang: That’s right.
Tom Temin: We’re speaking with Karam Kang. She’s an economics professor at Carnegie Mellon University, and co-author of a report called Winning By default, Why There is So Little Competition in Government Procurement. So in those cases where it is sole source, which is sounds like a lot of them, and where there’s limited competition, only two bidders, then you mentioned earlier that the government has ways of getting great prices anyway. And what did you discover there?
Karam Kang: Yes, so the government officials have a choice about what kind of contract they want to use. So they could go with a firm fixed, to contracts there are depends on cost. So the higher costs, you pay more as opposed to like a firm fixed contract price. And then within this contract format, there are a lot of ways to change the contract price, as a function of performance and other measures that you can see throughout the history of a contract. And what we’re discovering is that this discretion in writing contracts, and negotiating even with a single vendor, can decrease the contract price. It’s like you’re kind of figuring out how much it would cost to actually produce a service. You don’t know that information front end as a buyer, however, by with the negotiation process by contracting, you can kind of figure that out and push the price down. So short answer is the negotiation can reduce the price with a bargaining power that you have.
Tom Temin: And this is true for contracts for products, as well as contracts for services?
Karam Kang: Correct. So we did look at both products and services.
Tom Temin: All right. What should the government then do you think take away from the study? What’s the significance here?
Karam Kang: So there was an important procurement reform during the Clinton administration, which allowed more discretion by the government officials in charge of procurement. So my reading of the Federal Acquisition Regulations for example, the contracting agencies can choose whether to use an auction format or negotiate with a bidder, how much effort to exert in order to search for more vendors and the type of contract, which we study, which determines how payment will depend on performance. So why is it important? Our study shows that this discretion I was talking about given to the officials is working pretty well, at least in my sample of contracts, in the sense that imposing regulations to increase competition is not necessarily going to reduce government costs, especially considering their administrative costs.