Grim Trigger or Cost Shifter: Dynamic Medicine Auctions in the Philippines

We look at the effect of a bid cap policy in procurement auctions for medicine. The policy of interest sets the reserve price for a given drug as the median or minimum of the winning bid prices across locations in a previous period. This can act as a mechanism to “harvest” downward pressure on price from more competitive markets and use their outcomes to keep prices low in markets with less intense competition. A consequence of the design could be that in some markets, competition actually suffers causing auctions to fail, bid caps to be abandoned, and prices not falling by very much. Alternatively, sellers sufficiently valuing future profits can engage in a grim trigger strategy opening up the possibility of sustained cooperation and higher prices. Using procurement data from 2012 to 2019, we estimate the policy’s effect on transaction prices faced by government hospitals in the Philippines. A triple differences design is used to address potential parallel trends bias in a standard difference-in-differences design but estimates from both tell a similar story. We find that that the policy led to a statistically significant reduction in transaction prices as well as in price dispersion, on average.