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Sequential procurement auctions and their effect on investment decisions

Sequential procurement auctions and their effect on investment decisions We characterize the optimal mechanism and investment level in an environment where (i) two projects of independent costs are purchased sequentially, (ii) the buyer can commit to a two‐period mechanism, and (iii) the winner of the first project can invest in a cost‐reducing technology between auctions. We show that, in an attempt to induce more competition in the first period, the optimal mechanism gives an advantage to the first‐period winner in the second auction. As a result of this advantage, the first‐period winner invests more than the socially efficient level. Optimal advantages, therefore, create two different channels for cost minimization in buyer‐supplier relationships. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Rand Journal of Economics Wiley

Sequential procurement auctions and their effect on investment decisions

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References (32)

Publisher
Wiley
Copyright
© 2015 The RAND Corporation
ISSN
0741-6261
eISSN
1756-2171
DOI
10.1111/1756-2171.12112
Publisher site
See Article on Publisher Site

Abstract

We characterize the optimal mechanism and investment level in an environment where (i) two projects of independent costs are purchased sequentially, (ii) the buyer can commit to a two‐period mechanism, and (iii) the winner of the first project can invest in a cost‐reducing technology between auctions. We show that, in an attempt to induce more competition in the first period, the optimal mechanism gives an advantage to the first‐period winner in the second auction. As a result of this advantage, the first‐period winner invests more than the socially efficient level. Optimal advantages, therefore, create two different channels for cost minimization in buyer‐supplier relationships.

Journal

The Rand Journal of Economics – Wiley

Published: Oct 1, 2015

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