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Dynamics in Non-Binding Procurement Auctions with Boundedly Rational Bidders

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We study a procurement auction recently analysed by Gal-Or et al. (2007). In this auction game the buyer ranks different bids on the basis of both the prices submitted and the quality of each bidder that is her private information. We emphasise the similarity between this model and existing models of competition in horizontally differentiated markets. Finally we illustrate conditions for the existence and the stability of such equilibrium. To this end we extend the model to a dynamic setting in which a sequence of independent auctions takes place. We assume bidders have bounded rationality in a twofold sense. On one hand, they use an underparametrized model of their competitors’ behaviour, best responding to expectations on average bids rather than keeping track of the entire vector of competitors’ bids. On the other they update expectations adaptively. In a general framework with more than two bidders the system may fail to converge to the steady state, i.e. to the symmetric Nash equilibrium of the original game.

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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Economics with number wp2009_03.rdf.

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Length: 16 pages
Date of creation: 2009
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Handle: RePEc:frz:wpaper:wp2009_03.rdf

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Keywords: Non-binding auctions; Product differentiation; Hotelling Duopoly; Expectations; Stability of steady states;

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  1. An, Mark Yuying, 1995. "Logconcavity versus Logconvexity: A Complete Characterization," Working Papers 95-03, Duke University, Department of Economics.
  2. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Esther Gal-Or & Mordechai Gal-Or & Anthony Dukes, 2007. "Optimal information revelation in procurement schemes," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 400-418, 06.
  4. Chan, Chris & Laplagne, Patrick & Appels, David, 2003. "The Role of Auctions in Allocating Public Resources," Staff Research Papers 31916, Productivity Commission.
  5. Jossa Bruno, 2004. "La teoria economica delle cooperative di produzione e il pensiero di Gramsci," Economia politica, Società editrice il Mulino, issue 3, pages 413-436.
  6. Cason, Timothy N. & Gangadharan, Lata & Duke, Charlotte, 2003. "A laboratory study of auctions for reducing non-point source pollution," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 446-471, November.
  7. Simon Board, 2009. "Revealing information in auctions: the allocation effect," Economic Theory, Springer, vol. 38(1), pages 125-135, January.
  8. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  9. Borzaga, Carlo & Tortia, Ermanno, 2004. "Dalla Cooperazione Mutualistica alla Cooperazione Sociale," AICCON Working Papers 6-2004, Associazione Italiana per la Cultura della Cooperazione e del Non Profit.
  10. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
  11. James Meade., . "Agathotopia," Hume Papers 16, David Hume Institute.
  12. Puu, T., 1998. "The chaotic duopolists revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 385-394, January.
  13. Leonardo Rezende, 2009. "Biased procurement auctions," Economic Theory, Springer, vol. 38(1), pages 169-185, January.
  14. Zamagni, Stefano, 2005. "Per una teoria economico-civile dell'impresa cooperativa," AICCON Working Papers 10-2005, Associazione Italiana per la Cultura della Cooperazione e del Non Profit.
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