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Competition in or for the Field: Which is Better?

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Author Info
Eduardo Engel
Ronald Fischer
Alexander Galetovic

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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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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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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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References listed on IDEAS
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. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter. [Downloadable!] (restricted)
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2000. "How to Auction an Essential Facility when Underhand Integration is Possible," Documentos de Trabajo 79, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
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  3. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October. [Downloadable!] (restricted)
    Other versions:
  4. Caillaud, Bernard & Tirole, Jean, 2001. "Essential Facility Financing and Market Structure," CEPR Discussion Papers 2802, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June. [Downloadable!] (restricted)
  6. 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, vol. 15(2), pages 141-63, March. [Downloadable!] (restricted)
  7. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2001. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 993-1020, October. [Downloadable!] (restricted)
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  1. Laure Athias & Antonio Nuñez, 2006. "Number of Bidders and the Winner’s Curse in Toll Road Concessions: An Empirical Analysis," Working Papers 2006-16, Center for Network Industries and Infrastructure (CNI). [Downloadable!]
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