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AN-012: 10% SME price preference benchmark

Intuition (plain-language)

What if, instead of banning non-SMEs, you give SMEs a 10% bid discount for winner selection? Everyone still competes, so the simulated price barely moves — yet SMEs win more often. The preference buys redistribution without sacrificing price discipline; it is a static design benchmark, not a forecast of a specific legal regime.

Question

A static price preference is a non-exclusionary design alternative to a set-aside: SMEs receive a percentage haircut to their bids for winner selection only, but all firms remain eligible to participate and the government pays the actual winning bid. What is the simulated price effect of a 10% SME preference, and how much SME win-rate gain does it deliver?

Design

  • Sample: structural cells from AN-010.
  • Variation: counterfactual policy regime \(V_3\) (10% SME price preference for selection) vs \(S_1\) (open).
  • Specification: BNE simulation; SME bid is multiplied by 0.90 for selection only; the government pays the actual (unhaircut) winning bid.
  • Outcomes: \(\Delta p = p^{V_3} - p^{S_1}\) (simulated price shift); SME win-rate gain.

Results

From v8-jpube/output/values.tex (10% SME price preference for selection only; government pays actual winning bid; entry held fixed):

Class \(\Delta p\) vs \(S_1\) SME win-rate gain
Non-pharma −0.004 +4.3 pp
Pharma +0.002 +1.4 pp

Both price shifts are essentially zero in reference-price units — non-SMEs continue to bid and discipline the price-forming order statistic. The SME win-rate gain is smaller than under full set-aside (which delivers full SME-winner concentration by construction); the preference trades redistribution for preserved competitive discipline.

Output: macros in v8-jpube/output/values.tex; paper table tab_welfare_policy_v8 columns 5–6 in §5.

Entry-response bound on the welfare ranking

The static comparison holds entry fixed. The legal shock does not identify entry costs, so instead of a free-entry counterfactual the paper bounds the welfare ranking \(V_3 \succ V_0\) (10% preference vs full set-aside). The worst case for \(V_3\) runs through non-SMEs: the preference handicaps them, so they may enter less and weaken the very discipline that makes \(V_3\) cheap. Non-SME participation under \(V_3\) is scaled to \(\phi\) times its open-auction rate (\(\phi \in [0,1]\), with \(\phi = 1\) the no-response case used in the main text), while SME entry is held conservatively at its pre-policy rate (a real preference would raise it, which only helps \(V_3\)).

From §6.4 of the paper and Online Appendix OA-E (Table OA-3, v8-jpube/output/values_entry_bound.tex):

  • Non-pharma: the \(V_3 \succ V_0\) ranking survives until the preference drives out ~90% of non-SME entrants (\(\phi \approx 0.10\)) — participation collapsing from 2.68 to about a quarter of a bidder per auction.
  • Pharma: the ranking survives even the complete removal of non-SME entry (the full set-aside is so costly there).
  • Letting SME entry respond (which a real preference would induce) only widens \(V_3\)'s margin in both classes.

This is a bound, not a free-entry counterfactual — entry costs are not identified. But it shows the near-zero static cost result is not an artifact of the fixed-entry assumption: the preference's advantage survives extreme non-SME discouragement before the ranking could flip.

Interpretation

The 10% preference preserves the price-forming pool: non-SMEs continue to bid and discipline the price-forming order statistic. The simulated price is essentially unchanged from \(S_1\). The preference is a redistribution device — SMEs win more often than under open competition — but the redistribution is smaller than under the full set-aside.

The reading is that the relevant policy frontier is not "support SMEs vs do nothing" but "exclusionary redistribution vs support that preserves the price-forming bidder pool". The 10% preference is a static design benchmark of the second branch, not a forecast of a legal preference regime.

Confidence: yellow. The simulation holds entry fixed at the pre-policy level by construction — an entry-elastic version would require a separate entry model. The entry-response bound above shows the \(V_3 \succ V_0\) ranking is robust to extreme non-SME discouragement (~90% in non-pharma; complete removal in pharma) even without identifying entry costs, but it remains a bound, not a free-entry counterfactual. The 10% margin is the cleanest design benchmark; the diminishing-returns curve and the preference level at which non-SMEs start dropping out is in the optimal-preference search.

Follow-ups

  • Optimal-preference search (v7-jpube-tight/scripts/61_optimal_preference.R) over margins \(\in \{0\%, 5\%, 10\%, 15\%, 20\%, 25\%\}\): deserves its own AN page to expose the design frontier.
  • Distributional incidence (v7-jpube-tight/scripts/60_distributional_incidence.R): is the SME win-rate gain spread across SME firm sizes, or concentrated on marginal firms barely above the SME threshold? Important for evaluating the preference against alternative SME-support instruments.
  • Entry-elastic preference benchmark: a version where preference shifts firms' decision to participate. The entry-response bound (§6.4, Online Appendix OA-E) already shows the \(V_3 \succ V_0\) ranking survives ~90% non-SME discouragement in non-pharma (complete removal in pharma); a full free-entry counterfactual that identifies entry costs remains out of scope for this paper.