Competitive Bid – Definition

Cite this article as:"Competitive Bid – Definition," in The Business Professor, updated October 6, 2019, last accessed October 24, 2020,


Competitive Bid Definition

Competitive bids refer to prices that are offered by a vendor or any other business individual to a firm for its goods and services. For a vendor or service provider to win a contract, they’re required to submit a competitive bid.

A Little More on What is a Competitive Bid

Under competitive bids, a company is usually seeking for a contract which it aims to carry out from a business willing to release such contract. When a firm or institution wants large volume of goods, or are seeking for long-term relations or long term supplies, it’d  usually send out an offer or an appeal in the form of a document known as request for proposal (RFP). This request is usually sent out for materials, technology projects, infrastructural programs and projects, pension fund management, and other business related activities. In some cases, materials might include raw materials, especially when the requesting firm or organization is a government agency. Unlike a reverse auction (where sellers make bid), the bidder with the lowest price is not guaranteed the contract as trust and capabilities are also put into play during a competitive bid. The purchaser generally chooses who he or she confides in to deliver potentials as he or she (the purchaser) will get to benefit if all turns out well.

Competitive Bid on Wall Street

On Wall Street, competitive bids are generally likened to IPOs (initial public offerings) where an underwriter is required to submit a sealed bid to a company or firm that is releasing a new set of stocks. The company might be old or new, or the stock might belong to one of its newest subsidiaries. The issuer (which is the firm in this case) would then compare all sealed bids from different underwriters, and in the process of doing this, would award the contract to whoever it sees fit. The choice of who to award the contract is primarily based on who has the best contract terms and best prices. In stocks market, competitive bidding doesn’t hold much stand as negotiated bidding seems to be in full force. However, when it comes to bidding for municipal bonds, it is widely applied. In order for an initial public offering to be successful, there must be underwriting from different bidders. These underwriters might be venture capitalists, wealth investors, and even big corporations. In most cases, underwriters are usually investment banks, and they’re responsive for making sure that the issuer’s stocks are being sold when they launch (go public). Firms and issuers however prefer to make use of negotiated bids due to confidence, and in several cases, they might decide to work with multiple underwriters. In this case, these underwriters are called syndicates and the risk of the IPO is divided equally between each party.

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