The Value of a Right of First Refusal Clause in a Procurement First-Price Auction
AbstractIn 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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Bibliographic InfoPaper provided by CRESE in its series Working Papers with number 2012-03.
Length: 18 pages
Date of creation: Nov 2012
Date of revision:
auctions; right of first refusal; risk-aversion;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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