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Auctions vs. Negotiations: The Case of Favoritism

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  • Wambach, Achim
  • Gretschko, Vitali

Abstract

We compare two commonly used mechanisms in procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer s preferences and may collude with one of the sellers. We provide a precise definition of both mechanisms and show contrary to conventional wisdom that an intransparent negotiation yields a higher buyer surplus than a transparent auction for a range of parameters. In particular, for small expected punishments there exists a lower and an upper bound on the number of sellers such that the negotiation yields a higher buyer surplus with a probability arbitrary close to 1 in the parameter space. Moreover, if the expected punishment is small, the negotiation is always more efficient and generates a higher surplus for the sellers. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79774.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79774

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  1. Celentani, Marco & Ganuza, Juan-Jose, 2002. "Corruption and competition in procurement," European Economic Review, Elsevier, Elsevier, vol. 46(7), pages 1273-1303, July.
  2. Paulo Klinger Monteiro & Flavio Menezes, 2001. "Corruption and auctions," Microeconomics, EconWPA 0105002, EconWPA.
  3. Roberto Burguet & Martin Perry, 2000. "Bribery and Favoritism by Auctioneers in Sealed Bid Auctions," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1827, Econometric Society.
  4. Federico Weinschelbaum & Leandro Arozamena, 2004. "The Effect of Corruption on Bidding Behavior in First-Price Auctions," Econometric Society 2004 Latin American Meetings, Econometric Society 180, Econometric Society.
  5. Athey, S., 1997. "Sigle Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 97-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Fluck, Zsuzsanna & John, Kose & Ravid, S. Abraham, 2007. "Privatization as an agency problem: Auctions versus private negotiations," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(9), pages 2730-2750, September.
  7. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 9(1), pages 9-42, March.
  8. Florence Naegelen, 2002. "original papers : Implementing optimal procurement auctions with exogenous quality," Review of Economic Design, Springer, Springer, vol. 7(2), pages 135-153.
  9. David McAdams & Michael Schwarz, 2007. "Credible Sales Mechanisms and Intermediaries," American Economic Review, American Economic Association, American Economic Association, vol. 97(1), pages 260-276, March.
  10. Manelli, Alejandro M & Vincent, Daniel R, 1995. "Optimal Procurement Mechanisms," Econometrica, Econometric Society, Econometric Society, vol. 63(3), pages 591-620, May.
  11. Andrea Prat & Tommaso M. Valletti, 2001. "Spectrum Auctious Versus Beauty Contests: Costs and Benefits," Rivista di Politica Economica, SIPI Spa, SIPI Spa, vol. 91(4), pages 65-114, April-May.
  12. Lengwiler, Yvan & Wolfstetter, Elmar, 2010. "Auctions and corruption: An analysis of bid rigging by a corrupt auctioneer," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(10), pages 1872-1892, October.
  13. McMillan, John, 1995. "Why auction the spectrum?," Telecommunications Policy, Elsevier, Elsevier, vol. 19(3), pages 191-199, April.
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