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Auctions for Split-Award Contracts

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Author Info
Martin K Perry
Jozsef Sakovics ()

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Abstract

The buyer of a homogeneous input employs split-award contracting to divide his input requirements into two contracts that are awarded to different suppliers. The buyer uses a sequential second-price auction to award a larger primary contract and a smaller secondary contract. With a fixed number of suppliers participating in the auctions, we find that the buyer pays a higher expected price than with a sole-source auction. The premium paid to the winner of the secondary contract must also be paid to the winner of the primary contract as an opportunity cost of not winning the secondary contract. With fixed costs of participating in the auction, we identify the conditions under which a secondary contract can increase the number of suppliers and lower the expected price paid by the buyer. An optimal secondary contract can internalize the cost reductions from the new industry capacity and extract the rents of the suppliers. An optimal secondary contract can be particularly beneficial when the number of suppliers is limited by high fixed costs.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 90.

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Length: 32
Date of creation: Mar 2004
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Handle: RePEc:edn:esedps:90

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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.:
  1. 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. [Downloadable!] (restricted)
  2. Robert C. Marshall & Michael J. Meurer & Jean-Francois Richard, 1994. "Curbing Agency Problems in the Procurement Process by Protest Oversight," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 297-318, Summer. [Downloadable!] (restricted)
  3. Dick, Andrew R, 1992. "An Efficiency Explanation for Why Firms Second," Economic Inquiry, Oxford University Press, vol. 30(2), pages 332-54, April.
  4. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(3), pages 507-33, Fall.
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  5. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347. [Downloadable!] (restricted)
  6. McMillan, John, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-62, Summer. [Downloadable!] (restricted)
  7. Keith Waehrer & Martin Perry, 2002. "The Effects of Mergers in Open Auction Markets," Departmental Working Papers 200203, Rutgers University, Department of Economics. [Downloadable!]
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  8. McGuire, Thomas G. & Riordan, Michael H., 1995. "Incomplete information and optimal market structure public purchases from private providers," Journal of Public Economics, Elsevier, vol. 56(1), pages 125-141, January. [Downloadable!] (restricted)
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  9. James J. Anton & Dennis A. Yao, 1987. "Second Sourcing and the Experience Curve: Price Competition in Defense Procurement," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 57-76, Spring. [Downloadable!] (restricted)
  10. Rob, Rafael, 1986. "The Design of Procurement Contracts," American Economic Review, American Economic Association, vol. 76(3), pages 378-89, June.
  11. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November. [Downloadable!] (restricted)
  12. McAfee R. Preston & Vincent Daniel, 1993. "The Declining Price Anomaly," Journal of Economic Theory, Elsevier, vol. 60(1), pages 191-212, June. [Downloadable!] (restricted)
  13. Jean-Jacques Laffont & Jean Tirole, 1988. "Repeated Auctions of Incentive Contracts, Investment, and Bidding Parity with an Application to Takeovers," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 516-537, Winter. [Downloadable!] (restricted)
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  14. Michael H. Riordan & David E.M. Sappington, 1989. "Second Sourcing," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 41-58, Spring. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
  16. 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. [Downloadable!] (restricted)
  17. Engelbrecht-Wiggans, Richard, 1988. "Revenue equivalence in multi-object auctions," Economics Letters, Elsevier, vol. 26(1), pages 15-19. [Downloadable!] (restricted)
  18. Richard J. Gilbert & Paul Klemperer, 2000. "An Equilibrium Theory of Rationing," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 1-21, Spring.
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Cited by:
(explanations, 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.)

  1. Chrysovalantou Milliou, 2004. "Exclusive Dealing And Compatibility Of Investments," Economics Working Papers we044919, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  2. Inderst, Roman & Shaffer, Greg, 2004. "Retail Mergers: Buyer Power and Product Variety," CEPR Discussion Papers 4236, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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