A competitive auction is one where investors present their proposals to the issuer. Thus, they indicate, among other details, the price they are willing to pay.
Competitive auctions are often related to public tenders where bidding companies seek, for example, to develop an infrastructure project or to provide a public service to the State.
It should be noted that, unlike the competitive auction, in the non-competitive bidders only indicate the desired amount. That is, they do not indicate the price they are willing to pay or collect.
Competitive auction features
The characteristics of the public auction include:
- Not only the price is evaluated, but the competing company’s(operational and financial) capacity to fulfill the activity for which it seeks to be hired.
- Competitive auctions usually offer contracts with a set period of duration. At the end of this term, the contracted firm must renew the agreement if it wishes to continue its operation.
- To participate in these auctions, a proposal must be submitted that includes operational and financial details. In other words, the company must explain, for example, how it will build the highway that the government is bidding for. Thus, you must specify the technology you will use, the number of employees you will need, the terms you agree to meet, how it will be financed, among other details.
- Not only the government can organize this type of contest, but also private companies or institutions. Some mergers or acquisitions, for example, can be accomplished through competitive auctions. Thus, the purchasing firm must specify the price it is willing to pay to become a majority partner in the acquired company, as well as the terms on which the two organizations will unite their operations.
Competitive auction example
An example of a competitive auction may be, for example, when the State seeks to tender the construction of a new commuter train.
Then, you will receive proposals from different companies, national and foreign. Each of them will be thoroughly evaluated, with the concession not necessarily being given to the company that offers to carry out the work at the lowest cost, but rather to the company that has, for example, sufficient experience and good reputation to ensure a quality project.