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Presented By: Department of Economics

Centralizing Procurement: The Roles of Scale, Selection, and Variety

Andres Gonzales, Pontificia Universidad Catolica de Chile Business School

Andres Gonzales-Lira Andres Gonzales-Lira
Andres Gonzales-Lira
Centralized procurement intends to increase efficiency by reducing upstream market power through scale effects but may decrease variety and thus fail to accommodate buyers with heterogeneous preferences. Moreover, buyer voluntary participation may result in adverse selection into intermediation when costs are heterogeneous, limiting its gains. We study these mechanisms in the context of drug public procurement in Chile. Through a combination of reduced-form analyses and a structural model, we find sizable scale effects, substantial preference heterogeneity, and cost heterogeneity. We use our model to evaluate the impacts of voluntary centralized procurement and the desirability of introducing minimum centralized procurement mandates.

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