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Dynamics in Non-Binding Procurement Auctions with Boundedly Rational Bidders

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Abstract

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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Bibliographic Info

Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze dell'Economia e Dell'Impresa in its series Working Papers Series 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. Chris Chan & Patrick Laplagne & David Appels, 2003. "The Role of Auctions in Allocating Public Resources," Microeconomics 0304007, EconWPA.
  2. 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.
  3. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  4. An, Mark Yuying, 1995. "Logconcavity versus Logconvexity: A Complete Characterization," Working Papers 95-03, Duke University, Department of Economics.
  5. repec:ept:journl:v:xxi:y:2004:i:174en:p:413-436 is not listed on IDEAS
  6. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  7. 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.
  8. Leonardo Rezende, 2009. "Biased procurement auctions," Economic Theory, Springer, vol. 38(1), pages 169-185, January.
  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. Puu, T., 1998. "The chaotic duopolists revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 385-394, January.
  11. Simon Board, 2009. "Revealing information in auctions: the allocation effect," Economic Theory, Springer, vol. 38(1), pages 125-135, January.
  12. James Meade., . "Agathotopia," Hume Papers 16, David Hume Institute.
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