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Incentivizing variety in innovation contests with specialized suppliers

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  • Protopappas, Konstantinos
  • Rietzke, David

Abstract

We study the optimal design of an innovation contest where a buyer seeks product variety and faces a moral hazard problem. The suppliers are specialized and may differ in their flexibility to adopt approaches outside their areas of expertise. If the specializations are sufficiently different and suppliers are otherwise symmetric, the buyer attains the first-best with a fixed-prize contest (FPC). If one supplier is inherently advantaged or the specializations are sufficiently close, the first-best is unattainable with an FPC. In all cases, an auction is an optimal contest and implements the first-best, provided the buyer can discriminate within the contest; if not, the buyer may prefer an FPC.

Suggested Citation

  • Protopappas, Konstantinos & Rietzke, David, 2025. "Incentivizing variety in innovation contests with specialized suppliers," Games and Economic Behavior, Elsevier, vol. 153(C), pages 586-621.
    • Handle: RePEc:eee:gamebe:v:153:y:2025:i:c:p:586-621
    DOI: 10.1016/j.geb.2025.08.003
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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