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Investment incentives in procurement auctions

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  • Leandro Arozamena
  • Estelle Cantillon

Abstract

We investigate firms' incentives for cost reduction in the first price sealed bid auction, a format largely used for procurement. A central feature of the model is that we allow firms to be heterogeneous. Though private value first price auctions are not games with monotonic best responses, we find that for comparative statistic purposes they behave like these games. In particular, firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants. Moreover, both auction formats tend to favour investment by the current market leader and are therefore likely to reinforce asymmetries among market participants.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/9005.

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Date of creation: 2004
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Publication status: Published in: The Review of Economic Studies (2004) v.71 n° 1,p.1-18
Handle: RePEc:ulb:ulbeco:2013/9005

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