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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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  • Domenico Colucci & Nicola Doni & Vincenzo Valori, 2009. "Dynamics in Non-Binding Procurement Auctions with Boundedly Rational Bidders," Working Papers - Economics wp2009_03.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2009_03.rdf
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    More about this item

    Keywords

    Non-binding auctions; Product differentiation; Hotelling Duopoly; Expectations; Stability of steady states;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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