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Competition in or for the Field: Which is Better?

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  • Eduardo Engel
  • Ronald Fischer
  • Alexander Galetovic

Abstract

In many circumstances, a principal, who wants prices to be as low as possible, must contract with agents who would like to charge the monopoly price. This paper compares a Demsetz auction, which awards an exclusive contract to the agent bidding the lowest price (competition for the field) with having two agents provide the good under (imperfectly) competitive conditions (competition in the field). We obtain a simple sufficient condition showing unambiguously which option is best. The condition depends only on the shapes of the surplus function of the principal and the profit function of agents, and is independent of the particular duopoly game played ex post. We apply this condition to three canonical examples -- procurement, royalty contracts and dealerships -- and find that whenever marginal revenue for the final good is decreasing in the quantity sold, a Demsetz auction is best. Moreover, a planner who wants to maximize social surplus also prefers a Demsetz auction.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8869.

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Date of creation: Apr 2002
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Handle: RePEc:nbr:nberwo:8869

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  1. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, American Economic Association, vol. 77(3), pages 375-87, June.
  2. Francine Lafontaine & Kathryn L. Shaw, 1996. "The Dynamics of Franchise Contracting: Evidence from Panel Data," NBER Working Papers 5585, National Bureau of Economic Research, Inc.
  3. Gallini, Nancy T, 1984. "Deterrence by Market Sharing: A Strategic Incentive for Licensing," American Economic Review, American Economic Association, American Economic Association, vol. 74(5), pages 931-41, December.
  4. Caillaud, Bernard & Tirole, Jean, 2001. "Essential Facility Financing and Market Structure," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2802, C.E.P.R. Discussion Papers.
  5. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2000. "How to Auction an Essential Facility when Underhand Integration is Possible," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 79, Centro de Economía Aplicada, Universidad de Chile.
  6. Eduardo M.R.A. Engel & Ronald D. Fischer & Alexander Galetovic, 1998. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," NBER Working Papers 6689, National Bureau of Economic Research, Inc.
  7. Harstad, Ronald M & Crew, Michael A, 1999. "Franchise Bidding without Holdups: Utility Regulation with Efficient Pricing and Choice of Provider," Journal of Regulatory Economics, Springer, Springer, vol. 15(2), pages 141-63, March.
  8. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262192756, December.
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Cited by:
  1. Athias, Laure & Nunez, Antonio, 2008. "The more the merrier? Number of bidders, information dispersion, renegotiation and winner’s curse in toll road concessions," MPRA Paper 10539, University Library of Munich, Germany.

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