1. The Problem of Predatory Bidding in Competitive Tenders
– a Swedish Case Study
Paper prepared for the
1st Conference on Railroad Industry Structure, Competition and Investment
Toulouse, November 7-8, 2003
Gunnar Alexandersson & Staffan Hultén
EFI / Stockholm School of Economics
P.O. Box 6501
SE Stockholm
SWEDEN
phone:
fax:

2. 1. Introduction
2. Low bids in tenders – is there a problem?
3. The legislator’s view on low bids in tenders
4. A recent case: the tender of the train services
to Northern Sweden
Costs, revenues and subsidies in detail
What do previous tenders of train services show?
5. Discussion and conclusions

3. Why do firms place low bids in tenders?
The desirable case:
Unique competence
Innovative ideas on production methods
Economies of scale/scope

4. Why do firms place low bids in tenders?
Three different types of less desirable explanations:
1. To force competitors to leave the market
2. A subsidiary to the procuring organisation places
a bid that, if it turns out to be impossible to fulfil,
presupposes more money from the owner
3. Carelessness or ignorance

5. Predatory Pricing
A firm, usually an incumbent, is dumping prices with a
consciously calculated loss, or is able to use profits
gained in other branches of its business through cross
subsidisation
Hits competitors first, making them exit the particular
market. Then consumers are affected, facing higher
prices and worsened supply.
Difficult to separate predatory pricing from fierce but
healthy price competition

6. Predatory pricing - does it exist?
Industrial economists: looking at historical evidence
The Chicago School: Predatory pricing is rare if existing at all since
it is seldom or never rational. This is because:
a) it is costly
b) it is difficult to recoup by future monopoly profits
Later theory development, e.g. decision and game theory:
Strategy may be rational in the presence of asymmetric information
Aggressive pricing has a strong signalling effect, deterring entry
Irrational from a profit-maximising perspective may be rational when
other objectives are taken into account.

7. – some special circumstances
Public procurement
– some special circumstances
Procuring entity has a strong position as a buyer,
sometimes close to a monopsonist
The winning bidder enjoys a monopoly-like position during
the contract period, but its actual powers are often very
restricted in terms of pricing and supply levels
End consumers (when present), are bound to use the
supplier chosen by the procuring entity
Bids that imply low profitability create a risk that the
supplier will not be able to fulfil the conditions of the
contract, causing interruptions in delivery
If problems arise, shifting to another supplier is seldom an
option in the short run, not even for the procuring entity

8. The legislator’s view on predatory pricing
America (U.S. and Canada):
Key question: is recoupment possible?
Market structure is crucial
If entry barriers are low – don’t investigate further

9. The legislator’s view on predatory pricing European Union:
Does not consider predatory pricing as such;
instead, focus is on price reductions as one of several
practices related to abuse of dominant position
Price reductions considered serious whenever
practised by dominant firms and aimed at specific
competitors
Successful strategy or not does not really matter
Relevant market is an important issue

10. The tender of the trains to Northern Sweden Background
Passenger train services (mainly night trains) running from Gothenburg
and Stockholm to the very north of Sweden
Tendered seven times since 1992
Net cost contract
New tendering authority, Rikstrafiken, established in
SJ (former monopolist) won the first five tenders
Tågkompaniet won the 6th tender, entering in January 2000
Implied a reduction in subsidies from 122 million SEK/year to 114 million SEK/year (on average)
Connex won the 7th tender, entering in June 2003
Implies a reduction in subsidies to
62 million SEK/year (on average)

11. Table 1: The bids of Connex and Tågkompaniet in
Rikstrafiken´s tender of the Northern trains (million SEK)

15. Conclusions Likely case of predatory bidding
Procuring authority has not investigated bids thoroughly
Costly legal aftermath likely
Need for reformation of procurement and competition regulation:
1. Alternative forms of procurement?
2. Measures for determining when bids are too low
3. Take into account the size of firms entering new markets
4. Consider the problems related to fulfilment of low bids
in the service sector