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Split-award contracts with investment

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Author Info

  • Gong, Jiong
  • Li, Jianpei
  • McAfee, R. Preston

Abstract

This paper studies procurement contracts where a buyer can either divide full production among multiple suppliers or award the entire production to a single supplier. We examine the effect of using multiple suppliers on investment incentives. In a framework of generalized second-price auctions with pre-auction investment, we show that the optimality of split-award depends on the socially efficient number of firms at the investment stage. When that number is greater than one, sole-sourcing is buyer-optimal. When that number is one, split-award lowers the buyer procurement cost.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 96 (2012)
Issue (Month): 1 ()
Pages: 188-197

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Handle: RePEc:eee:pubeco:v:96:y:2012:i:1:p:188-197

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: Split-award; Generalized second-price auctions; Investment;

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References

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  1. Martin K. Perry & JÛzsef S·kovics, 2003. "Auctions for Split-Award Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 51(2), pages 215-242, 06.
  2. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  3. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
  4. Anton, James J. & Brusco, Sandro & Lopomo, Giuseppe, 2010. "Split-award procurement auctions with uncertain scale economies: Theory and data," Games and Economic Behavior, Elsevier, vol. 69(1), pages 24-41, May.
  5. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February.
  6. Leandro Arozamena & Estelle Cantillon, 2004. "Investment incentives in procurement auctions," ULB Institutional Repository 2013/9005, ULB -- Universite Libre de Bruxelles.
  7. Benny Moldovanu & Aner Sela, 2001. "The Optimal Allocation of Prizes in Contests," American Economic Review, American Economic Association, vol. 91(3), pages 542-558, June.
  8. James J. Anton & Dennis A. Yao, 1989. "Split Awards, Procurement, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 538-552, Winter.
  9. Roman Inderst, 2008. "Single sourcing versus multiple sourcing," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 199-213.
  10. Anton, James J & Yao, Dennis A, 1992. "Coordination in Split Award Auctions," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 681-707, May.
  11. Ian King & R. Preston McAfee & Linda Welling, 1993. "Industrial Blackmail: Dynamic Tax Competition and Public Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 590-608, August.
  12. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November.
  13. Tunay I. Tunca & Qiong Wu, 2009. "Multiple Sourcing and Procurement Process Selection with Bidding Events," Management Science, INFORMS, vol. 55(5), pages 763-780, May.
  14. Thomas P. Lyon, 2006. "DOES DUAL SOURCING LOWER PROCUREMENT COSTS? -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(2), pages 223-252, 06.
  15. King, Ian & Welling, Linda & Preston McAfee, R., 1992. "Investment decisions under first and second price auctions," Economics Letters, Elsevier, vol. 39(3), pages 289-293, July.
  16. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  17. Piccione, Michele & Tan, Guofu, 1996. "Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 663-85, August.
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Cited by:
  1. Alcalde, José & Dahm, Matthias, 2013. "Competition for procurement shares," Games and Economic Behavior, Elsevier, vol. 80(C), pages 193-208.

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