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Abstract

We study procurement procedures that simultaneously determine specification and price of a good. Suppliers can offer and produce the good in either of two possible specifications, both of which are equally good for the buyer. Production costs are interdependent and unknown at the time of bidding. Each supplier receives two signals about production cost, one per specification. Our model is a special case of the interdependent-value settings with multi-dimensional types in Jehiel and Moldovanu (2001) where an efficient and incentive compatible mechanism exists. We characterize equilibrium bidding behavior if the winning supplier is selected purely on the basis of price, regardless of the specification offered. While there is a positive chance of obtaining an inefficient specification, this procurement mechanism involves lower information rents than efficient mechanisms, suggesting that there is a trade-off between minimizing expected expenditure for the good, and ensuring that the efficient specification is chosen.

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File URL: ftp://ftp.bham.ac.uk/pub/RePEc/pdf/11-03RR.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 11-03rr.

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Length: 53 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:bir:birmec:11-03rr

Contact details of provider:
Postal: Edgbaston, Birmingham, B15 2TT
Web page: http://www.economics.bham.ac.uk
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Related research

Keywords: Procurement; interdependent valuations; multi-dimensional information; efficient mechanisms; optimal mechanisms;

Find related papers by JEL classification:

• C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
• D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

This paper has been announced in the following NEP Reports:

• NEP-ALL-2012-01-18 (All new papers)
• NEP-CTA-2012-01-18 (Contract Theory & Applications)
• NEP-GTH-2012-01-18 (Game Theory)
• NEP-MIC-2012-01-18 (Microeconomics)

References

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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1. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521551847.
   
   • Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721.
2. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
3. Leonardo Rezende, 2009. "Biased procurement auctions," Economic Theory, Springer, vol. 38(1), pages 169-185, January.
4. John Asker & Estelle Cantillon, 2010. "Procurement when Price and Quality Matter," ULB Institutional Repository 2013/99378, ULB -- Universite Libre de Bruxelles.
   
   • John Asker & Estelle Cantillon, 2010. "Procurement when price and quality matter," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 1-34.
   • Asker, John & Cantillon, Estelle, 2007. "Procurement when Price and Quality Matter," CEPR Discussion Papers 6082, C.E.P.R. Discussion Papers.
   • John Asker & Estelle Cantillon, 2006. "Procurement When Price and Quality Matter," Working Papers 06-24, New York University, Leonard N. Stern School of Business, Department of Economics.
5. Anja Schöttner, 2008. "Fixed-prize tournaments versus first-price auctions in innovation contests," Economic Theory, Springer, vol. 35(1), pages 57-71, April.
   
   • Anja Schöttner, 2005. "Fixed-Prize Tournaments versus First-Price Auctions in Innovation Contests," SFB 649 Discussion Papers SFB649DP2005-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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