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The Value of a Right of First Refusal Clause in a Procurement First-Price Auction

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Author Info

  • Karine Brisset

    ()
    (CRESE, Université de Franche-comté)

  • François Cochard

    ()
    (CRESE, Université de Franche-comté)

  • François Maréchal

    ()
    (CRESE, Université de Franche-comté)

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    Abstract

    In a procurement first-price sealed-bid auction with risk-averse suppliers, we determine the conditions under which the buyer has an incentive to grant a supplier a right of first refusal. We show that this clause can lower the buyer’s expected cost when suppliers (the incumbent and new suppliers) are risk-neutral or slightly risk-averse. We also show that the incumbent’s expected utility is higher when he is granted a right of first refusal than when he competes under a first-price auction. So, this clause may benefit both the buyer and the favored supplier.

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    File URL: http://crese.univ-fcomte.fr/WP-2012-03.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by CRESE in its series Working Papers with number 2012-03.

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    Length: 18 pages
    Date of creation: Nov 2012
    Date of revision:
    Handle: RePEc:crb:wpaper:2012-03

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    Related research

    Keywords: auctions; right of first refusal; risk-aversion;

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    References

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    1. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "The effect of corruption on bidding behavior in first-price auctions," European Economic Review, Elsevier, Elsevier, vol. 53(6), pages 645-657, August.
    2. Klemperer, Paul, 1999. "Auction Theory: a Guide to the Literature," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2163, C.E.P.R. Discussion Papers.
    3. Roberto Burguet & Martin Perry, 2000. "Bribery and Favoritism by Auctioneers in Sealed Bid Auctions," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1827, Econometric Society.
    4. Biais, Bruno & Bossaerts, Peter, 1998. "Asset Prices and Trading Volume in a Beauty Contest," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(2), pages 307-40, April.
    5. Shachat, Jason, 2009. "Procuring Commodities: Request for Quote or Reverse Auctions?," MPRA Paper 13418, University Library of Munich, Germany.
    6. Grosskopf, Brit & Roth, Alvin E., 2009. "If you are offered the Right of First Refusal, should you accept? An investigation of contract design," Games and Economic Behavior, Elsevier, Elsevier, vol. 65(1), pages 176-204, January.
    7. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(6), pages 1407-1424, November.
    8. Hayley H. Chouinard, 2005. "Auctions with and without the Right of First Refusal and National Park Service Concession Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 87(4), pages 1083-1088.
    9. Bikhchandani Sushil & Lippman Steven A. & Ryan Reade, 2005. "On the Right-of-First-Refusal," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 5(1), pages 1-44, April.
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