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Favoritism in asymmetric procurement auctions

  • Lee, Joon-Suk
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    I examine the costs and benefits of granting a right of first refusal (ROFR) to one bidder in a first-price procurement auction with two bidders. This right permits the favored bidder to win a contract by matching the bid of the competing bidder and is often observed in procurement auctions. I show that the auctioneer prefers to grant the ROFR to the ex-ante weak bidder and that granting this right can increase the auctioneer's expected payoff. The results continue to hold even when the auctioneer can set an optimal reserve price. Both the reserve price and the right of first refusal serve to elicit more aggressive bids and hence, to a certain degree, are substitute tools.

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    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 26 (2008)
    Issue (Month): 6 (November)
    Pages: 1407-1424

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    Handle: RePEc:eee:indorg:v:26:y:2008:i:6:p:1407-1424
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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    1. Michael H. Rothkopf & Ronald M. Harstad & Yuhong Fu, 2003. "Is Subsidizing Inefficient Bidders Actually Costly?," Management Science, INFORMS, vol. 49(1), pages 71-84, January.
    2. Cantillon, Estelle, 2008. "The effect of bidders' asymmetries on expected revenue in auctions," Games and Economic Behavior, Elsevier, vol. 62(1), pages 1-25, January.
    3. Philip J. Reny & Shmuel Zamir, 2002. "On the Existence of Pure Strategy Monotone Equilibria in Asymmetric First-Price Auctions," Discussion Paper Series dp292, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    4. Jeremy Bulow & Ming Huang & Paul Klemperer, 1996. "Toeholds and Takeovers," Finance 9608001, EconWPA.
    5. Roberto Burguet & Martin K. Perry, 2003. "Preferred Suppliers and Vertical Integration in Auction Market," Working Papers 74, Barcelona Graduate School of Economics.
    6. Federico Weinschelbaum & Leandro Arozamena, 2005. "The Effect of Corruption on Bidding Behavior in First-Price Auctions," Working Papers 82, Universidad de San Andres, Departamento de Economia, revised Aug 2005.
    7. Compte, O. & Lambert-Mogiliansky, A. & Verdier, T., 2000. "Corruption and Competition in Public Market Auctions," DELTA Working Papers 2000-01, DELTA (Ecole normale supérieure).
    8. Lebrun, Bernard, 1999. "First Price Auctions in the Asymmetric N Bidder Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 125-42, February.
    9. Marshall Robert C. & Meurer Michael J. & Richard Jean-Francois & Stromquist Walter, 1994. "Numerical Analysis of Asymmetric First Price Auctions," Games and Economic Behavior, Elsevier, vol. 7(2), pages 193-220, September.
    10. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
    11. Bikhchandani Sushil & Lippman Steven A. & Ryan Reade, 2005. "On the Right-of-First-Refusal," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 5(1), pages 1-44, April.
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