A rank-and-compare algorithm to detect abnormally low bids in procurement auctions

Authors:
Pier Luigi Conti;Livia De Giovanni;Maurizio Naldi
Affiliations:
Universití di Roma La Sapienza, Dipartimento di Scienze Statistiche, P.le Aldo Moro 5, 00185 Rome, Italy;Universití LUISS "Guido Carli", Dipartimento di Scienze Politiche, Rome, Italy;Universití di Roma "Tor Vergata", Dipartimento di Informatica, Sistemi e Produzione, Via del Politecnico 1, 00133 Rome, Italy
Venue:
Electronic Commerce Research and Applications
Year:
2012

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Abstract

Detecting abnormally low bids in procurement auctions is a recognized problem, since their acceptance could result in the winner not being able to provide the service or work awarded by the auction, which is a significant risk for the auctioneer. A rank-and-compare algorithm is considered to detect such anomalous bids and help auctioneers in achieving an effective rejection decision. Analytical expressions and simulation results are provided for the detection probability, as well as for the false alarm probability. The suggested range of application of the detection algorithm leaves out the cases of many tenderers (more than 20) and quite dispersed bids (coefficient of variation larger than 0.15). An increase in the number of tenderers leads to contrasting effects, since both the false alarm probability and the detection probability are reduced. If the bids are spread over a large range, we have instead a double negative effect, with more false alarms and less detections. The presence of multiple anomalous bids worsens the performance of the algorithm as well. On the other hand, the method is quite robust to the presence of courtesy bids.