06/06/2012

Caltech Economist: Potential for Disaster Is Built into Bidding System

Researchers from California Institute of Technology have recently published a study about the flawed competitive bidding program. Echoing the concerns of hundreds of economists, including Dr. Peter Cramton, the Caltech researchers agree that the competitive bidding program is "not an effective auction."

According to a release from Caltech, the researchers say that CMS auction was "designed with two unorthodox rules. First, the eventual selling price is set at the median of all of the winning bids. Second, bids are nonbinding, so companies can change their mind once the prices are set".

The release further states:

"Critics say that these rules cultivate a harmful bidding strategy. To ensure a winning bid, each company will make a very low offer; this carries no risk, because the companies can cancel their bid if the median price turns out to be too low. The result is that participants in the auction will tend to make low-ball bids, assuring that the median price will also be very low-so low, in fact, that few of the companies can actually afford it, leading them to cancel their offers. At the extreme, nothing is bought or sold" and, Plott says, "the auction crashes. It's just not an effective auction."

The study by Caltech Professor Charles R. Plott, PhD was not requested or funded by HME industry, according to Medtrade Monday Newsletter. It was published in Harvard University's May 2012 Quarterly Journal of Economics.