Introduction

A buyer always has the choice to procure a good or service with a single contract or divide it into several contracts. On the one hand, large firms and centralized public procurement agencies often find it optimal to divide supply into smaller, local lots because of the transportation costs linked to geographical dispersion. On the other hand, complementarities between different parts of the contract would suggest advantages from bundling them. But the division into lots has other important effects. By specifying the size of each lot, the division of a supply contract determines which potential suppliers have sufficient capacity to participate in each separate competitive tendering (for at least one lot), and which do not. By influencing participation, the division into lots has an important impact on the participants’ behaviour and on the final outcome. The division into lots also determines how a procurement contract can be ‘split’ among potential competitors, hence how easy it is for bidders to achieve and sustain implicit or explicit collusive agreements to share the supply at inflated prices.

Existing economic analysis provides only limited guidance when it comes to deciding the number of lots into which a supply contract should be divided, and deciding about their sizes. The reason is that standard textbooks usually consider cases with a fixed number of objects.