Strategies to Raise the state Buying Power Research Department

Regulatory framework Demand aggregation through framework agreements Framework agreements Decentralized tenders Centrally tendered with decentralized use One or more agencies

Using FA V/S individual purchases

Demand Aggregation: Health care sector singularity For drugs and medical devices there is one single buying agency (CENABAST) which aggregates demand and tender for the whole system. Afterwards, distribution is carried out to each Hospital. How different are drugs prices when procured through this centralized agency or when using framework agreements?

Demand Aggregation: CENABAST Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra Generic Drugs: Twice a year CENABAST aggregates Hospital´s demand and call for proposals through e-marketplace. Awarded products will have a 6 month fixed price. Ministerial Programs: Non generic drugs and vaccines are purchased by Ministerial command through CENABAST. Quantities and delivery structure is defined by the Ministry.

Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra Business Model: Recently deployed FA (April 2011). Scope: Generic drugs Call for proposals: Done by ChileCompra through Agreement duration: 3 years Prices: After the first year, prices may be updated depending on market conditions. Delivery mechanism: From vendors to purchasing units along the country. Payment system: decentralized Demand Aggregation: FA

Market structure CENABAST has a 36,6% market share (data in log scale): However, nowadays framework agreements are irrelevant in terms of market share

CENABAST and FA: comparative performance Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra The following table shows a comparison between the two purchasing mechanisms (CENABAST and FA), showing that under current conditions, they are complementary

Aggregating demand with framework agreements: 21% additional

Going beyond drugs: The case of computers: Savings 24,5%

Could framework agreements deliver additional savings?

Study of FA Mechanism Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra Some variables that affect prices in framework agreements: Agreements duration. Vendors pricing strategies. Estimated demand. Idiosyncratic industry features. Others factors UNCERTAINTY

Modeling FA as Options a la Black-Scholes Grounded evidence on the necessity of FA theory Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra Left: The portion of Bad assigments (i.e., expost inefficiency) as a function of alpha. Right: The fraction of time the big supplier is preferred out of the inefficient assignments as a function of alpha. While standard auctions are considered an efficient mechanism in many cases, in the presence of uncertainty about future demand, future spot prices, or the desired properties of the procured product, they become less successful in allocating goods to the most efficient suppliers. The figures bellow, emphasize auction inefficiency in the presence of demand uncertainty, in which even a simple randomizing mechanism (e.g., a coin flipping) may perform better in terms of efficiency than a standard auction. This suggests that procurement mechanisms that operate under this type of uncertainty such as FAs require a special treatment that goes beyond standard auctions.

The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity from the seller of the option at a certain time for a certain price..commodity The seller is obligated to sell the commodity if the buyer use the option. The buyer pays a fee (called a premium) for this right. Dealing with uncertainty: Systematic market risk Assessing a call premium research project Frameworks agreements may include a premium for allowing the buyer handle the underlying commodity uncertainty. Long Call Payoff Profit Share Price at Maturity Strike Price 0 Premium

Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra Dealing with uncertainty: Auction theory approach to asses demand uncertainty impact Dealing with uncertainty: Product Uncertainty and Horizontal Differentiation

Strategies to Raise the state Buying Power Research Department