Price Adjustment Policies and Firm Size

Abstract

A number of U.S. State Departments of Transportation have adopted a price adjustment policy designed to limit cost fluctuations of oil‐based inputs in government procurement. Similar policies are common in defense contracting, and have been used to offset financial losses of health insurance companies in Medicare and the Affordable Care Act. We show that while all bidders submit lower bids after the policy is introduced, the extent of bid reduction diminishes with firm size. Small new firms are able to compete more frequently, promoting auction competition and efficiency.