The curse of the winning taxi

Prices in this sector are abnormally low. This results in declining quality and financial distress with transportation companies. The main cause of abnornallly low tenders is the problem of the winner’s curse. Costs that are mostly fixed and fluctuating volumes that cannot be influenced, constitute a significant risk for transportation companies that needs to be assessed and valued in advance during the bidding process. Transporters that assess these risks positively have a greater chance of winning the tender and a greater chance of unprofitable execution of the contracted work.

The consequence is that the prices bid on contracts for target group transportation are structurally too low to cover the costs including a reasonable return. This is the problem of the winner’s curse. A second cause of the structural underbidding in is that transportation companies consciously anticipate renegotiations with the client during the execution of the contract. A third cause is ‘gambling for resurrection’: transporters that are in financial trouble submit very competitive bids in order to have a last chance at avoiding bankruptcy. They gamble to survive. The shrinking market in this sector has contributed to this problem. There are various solutions available to solve these problems.