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Favoritism in asymmetric procurement auctions

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  • Lee, Joon-Suk
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    Abstract

    I examine the costs and benefits of granting a right of first refusal (ROFR) to one bidder in a first-price procurement auction with two bidders. This right permits the favored bidder to win a contract by matching the bid of the competing bidder and is often observed in procurement auctions. I show that the auctioneer prefers to grant the ROFR to the ex-ante weak bidder and that granting this right can increase the auctioneer's expected payoff. The results continue to hold even when the auctioneer can set an optimal reserve price. Both the reserve price and the right of first refusal serve to elicit more aggressive bids and hence, to a certain degree, are substitute tools.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 26 (2008)
    Issue (Month): 6 (November)
    Pages: 1407-1424

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    Handle: RePEc:eee:indorg:v:26:y:2008:i:6:p:1407-1424

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    Web page: http://www.elsevier.com/locate/inca/505551

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    Keywords: Auctions Favoritism Right of first refusal;

    References

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    1. Marshall Robert C. & Meurer Michael J. & Richard Jean-Francois & Stromquist Walter, 1994. "Numerical Analysis of Asymmetric First Price Auctions," Games and Economic Behavior, Elsevier, vol. 7(2), pages 193-220, September.
    2. Philip J. Reny & Shmuel Zamir, 2002. "On the Existence of Pure Strategy Monotone Equilibria in Asymmetric First-Price Auctions," Discussion Paper Series dp292, The Center for the Study of Rationality, Hebrew University, Jerusalem.
    3. Jeremy Bulow & Ming Huang & Paul Klemperer, 1996. "Toeholds and Takeovers," Finance 9608001, EconWPA.
    4. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
    5. Compte, Olivier & Lambert-Mogiliansky, Ariane & Verdier, Thierry, 2000. "Corruption And Competition In Public Market Auctions," CEPR Discussion Papers 2434, C.E.P.R. Discussion Papers.
    6. Michael H. Rothkopf & Ronald M. Harstad & Yuhong Fu, 2003. "Is Subsidizing Inefficient Bidders Actually Costly?," Management Science, INFORMS, vol. 49(1), pages 71-84, January.
    7. Roberto Burguet & Martin K. Perry, 2003. "Preferred Suppliers and Vertical Integration in Auction Market," Working Papers 74, Barcelona Graduate School of Economics.
    8. repec:wop:humbsf:2000-72 is not listed on IDEAS
    9. Lebrun, Bernard, 1999. "First Price Auctions in the Asymmetric N Bidder Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 125-42, February.
    10. Bikhchandani Sushil & Lippman Steven A. & Ryan Reade, 2005. "On the Right-of-First-Refusal," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 5(1), pages 1-44, April.
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    Cited by:
    1. Federico Weinschelbaum & Leandro Arozamena, 2004. "The Effect of Corruption on Bidding Behavior in First-Price Auctions," Econometric Society 2004 Latin American Meetings 180, Econometric Society.
    2. Constantino Hevia & Martin Gonzalez-Rozada & Martin Sola & Fabio Spagnolo, 2014. "Estimating and Forecasting the Yield Curve Using a Markov Switching Dynamic Nelson and Siegel Model," BCAM Working Papers 1403, Birkbeck Centre for Applied Macroeconomics.
    3. Klenio Barbosa & Pierre C. Boyer, 2012. "Discrimination in Dynamic Procurement Design with Learning-by-doing," CESifo Working Paper Series 3947, CESifo Group Munich.
    4. Thomas, Charles J., 2011. "Vertical mergers in procurement markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 200-209, March.
    5. Li, Sherry Xin & Dogan, Kutsal & Haruvy, Ernan, 2011. "Group identity in markets," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 104-115, January.
    6. Domenico Colucci & Nicola Doni & Vincenzo Valori, 2012. "Preferential treatment in procurement auctions through information revelation," Working Papers - Mathematical Economics 2012-06, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    7. Leandro Arozamena & Federico Weinschelbaum, 2010. "On Favoritism in Auctions with Entry," Working Papers 103, Universidad de San Andres, Departamento de Economia, revised May 2010.
    8. Karine Brisset & François Cochard & François Maréchal, 2012. "The Value of a Right of First Refusal Clause in a Procurement First-Price Auction," Working Papers 2012-03, CRESE.
    9. Cabral, Luís & Vasconcelos, Hélder, 2011. "Vertical integration and right of first refusal," Economics Letters, Elsevier, vol. 113(1), pages 50-53, October.

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