IDEAS home Printed from https://ideas.repec.org/a/eee/pubeco/v96y2012i1p188-197.html
   My bibliography  Save this article

Split-award contracts with investment

Author

Listed:
  • Gong, Jiong
  • Li, Jianpei
  • McAfee, R. Preston

Abstract

This paper studies procurement contracts where a buyer can either divide full production among multiple suppliers or award the entire production to a single supplier. We examine the effect of using multiple suppliers on investment incentives. In a framework of generalized second-price auctions with pre-auction investment, we show that the optimality of split-award depends on the socially efficient number of firms at the investment stage. When that number is greater than one, sole-sourcing is buyer-optimal. When that number is one, split-award lowers the buyer procurement cost.

Suggested Citation

  • Gong, Jiong & Li, Jianpei & McAfee, R. Preston, 2012. "Split-award contracts with investment," Journal of Public Economics, Elsevier, vol. 96(1), pages 188-197.
    • Handle: RePEc:eee:pubeco:v:96:y:2012:i:1:p:188-197
    DOI: 10.1016/j.jpubeco.2011.10.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0047272711001575
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpubeco.2011.10.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Benny Moldovanu & Aner Sela, 2001. "The Optimal Allocation of Prizes in Contests," American Economic Review, American Economic Association, vol. 91(3), pages 542-558, June.
    2. Martin K. Perry & József Sákovics, 2003. "Auctions for Split‐Award Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 51(2), pages 215-242, June.
    3. B. Douglas Bernheim & Michael D. Whinston, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(1), pages 1-31.
    4. Anton, James J. & Brusco, Sandro & Lopomo, Giuseppe, 2010. "Split-award procurement auctions with uncertain scale economies: Theory and data," Games and Economic Behavior, Elsevier, vol. 69(1), pages 24-41, May.
    5. Leandro Arozamena & Estelle Cantillon, 2004. "Investment Incentives in Procurement Auctions," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 1-18.
    6. Piccione, Michele & Tan, Guofu, 1996. "Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 663-685, August.
    7. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
    8. Ian King & R. Preston McAfee & Linda Welling, 1993. "Industrial Blackmail: Dynamic Tax Competition and Public Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 590-608, August.
    9. Roman Inderst, 2008. "Single sourcing versus multiple sourcing," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 199-213, March.
    10. Tilman B?rgers & Ingemar Cox & Martin Pesendorfer & Vaclav Petricek, 2013. "Equilibrium Bids in Sponsored Search Auctions: Theory and Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 163-187, November.
    11. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
    12. Tunay I. Tunca & Qiong Wu, 2009. "Multiple Sourcing and Procurement Process Selection with Bidding Events," Management Science, INFORMS, vol. 55(5), pages 763-780, May.
    13. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
    14. James J. Anton & Dennis A. Yao, 1992. "Coordination in Split Award Auctions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 681-707.
    15. James J. Anton & Dennis A. Yao, 1989. "Split Awards, Procurement, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 538-552, Winter.
    16. Bag, Parimal Kanti, 1997. "Optimal auction design and R&D," European Economic Review, Elsevier, vol. 41(9), pages 1655-1674, December.
    17. Robert Wilson, 1979. "Auctions of Shares," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 675-689.
    18. King, Ian & Welling, Linda & Preston McAfee, R., 1992. "Investment decisions under first and second price auctions," Economics Letters, Elsevier, vol. 39(3), pages 289-293, July.
    19. Thomas P. Lyon, 2006. "Does Dual Sourcing Lower Procurement Costs?," Journal of Industrial Economics, Wiley Blackwell, vol. 54(2), pages 223-252, June.
    20. Tan, Guofu, 1992. "Entry and R & D in procurement contracting," Journal of Economic Theory, Elsevier, vol. 58(1), pages 41-60, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Philippe Jehiel & Laurent Lamy, 2020. "On the Benefits of Set-Asides," Journal of the European Economic Association, European Economic Association, vol. 18(4), pages 1655-1696.
    2. Thomas Giebe & Paul Schweinzer, 2015. "Probabilistic procurement auctions," Review of Economic Design, Springer;Society for Economic Design, vol. 19(1), pages 25-46, March.
    3. Jozsef Sakovics & Lluis Bru & Daniel Cardona, 2018. "Block sourcing," Edinburgh School of Economics Discussion Paper Series 287, Edinburgh School of Economics, University of Edinburgh.
    4. Feng, Xin & Lu, Jingfeng, 2018. "How to split the pie: Optimal rewards in dynamic multi-battle competitions," Journal of Public Economics, Elsevier, vol. 160(C), pages 82-95.
    5. Alcalde, José & Dahm, Matthias, 2013. "Competition for procurement shares," Games and Economic Behavior, Elsevier, vol. 80(C), pages 193-208.
    6. Jehiel, Philippe & Lamy, Laurent, 2014. "On discrimination in procurement auctions," CEPR Discussion Papers 9790, C.E.P.R. Discussion Papers.
    7. Alan Gelder & Dan Kovenock & Brian Roberson, 2022. "All-pay auctions with ties," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(4), pages 1183-1231, November.
    8. Giebe, Thomas, 2014. "Innovation contests with entry auction," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 165-176.
    9. Chen, Yongmin & Li, Jianpei, 2018. "Bundled procurement," Journal of Public Economics, Elsevier, vol. 159(C), pages 116-127.
    10. Jose Alcalde & Matthias Dahm, 2016. "Proportional payoffs in legislative bargaining with weighted voting: a characterization," Discussion Papers 2016-03, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    11. Sarah Parlane & Ying-Yi Tsai, 2013. "Optimal Contract Orders and Relationship-Specific Investments in Vertical Organizations," Working Papers 201316, School of Economics, University College Dublin.
    12. Baisa, Brian & Burkett, Justin, 2020. "Discriminatory price auctions with resale and optimal quantity caps," Theoretical Economics, Econometric Society, vol. 15(1), January.
    13. Sarah Parlane & Ying-Yi Tsai, 2014. "Optimal Sourcing Orders under Supply Disruptions and the Strategic Use of Buffer Suppliers," Working Papers 201417, School of Economics, University College Dublin.
    14. Richardson, Martin & Stähler, Frank, 2016. "On the “uniform pricing puzzle” in recorded music," Information Economics and Policy, Elsevier, vol. 34(C), pages 58-66.
    15. Bergman, Mats & Granlund, David & Rudholm, Niklas, 2016. "Squeezing the last drop out of your suppliers: an empirical study of market-based purchasing policies for generic pharmaceuticals," HUI Working Papers 116, HUI Research.
    16. Lluis Bru & Daniel Cardona, 2016. "Strategic Sourcing in Procurement," DEA Working Papers 82, Universitat de les Illes Balears, Departament d'Economía Aplicada.
    17. Mats A. Bergman & David Granlund & Niklas Rudholm, 2017. "Squeezing the Last Drop Out of Your Suppliers: An Empirical Study of Market-Based Purchasing Policies for Generic Pharmaceuticals," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 969-996, December.
    18. Fugger, Nicolas & Laitenberger, Ulrich, 2020. "Split-award auctions and supply disruptions," ZEW Discussion Papers 20-082, ZEW - Leibniz Centre for European Economic Research.
    19. Alcalde, José & Dahm, Matthias, 2019. "Dual sourcing with price discovery," Games and Economic Behavior, Elsevier, vol. 115(C), pages 225-246.
    20. Bru, Lluís & Cardona, Daniel & Sákovics, József, 2023. "Block sourcing plus," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1130-1140.
    21. Merckx, Gilles & Chaturvedi, Aadhaar, 2020. "Short vs. long-term procurement contracts when supplier can invest in cost reduction," International Journal of Production Economics, Elsevier, vol. 227(C).
    22. Lauton, Felix & Rothkopf, Alexander & Pibernik, Richard, 2019. "The value of entrant manufacturers: A study of competition and risk for donor-funded procurement of essential medicines," European Journal of Operational Research, Elsevier, vol. 272(1), pages 292-312.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alcalde, José & Dahm, Matthias, 2019. "Dual sourcing with price discovery," Games and Economic Behavior, Elsevier, vol. 115(C), pages 225-246.
    2. Jose Alcalde & Matthias Dahm, 2016. "Proportional payoffs in legislative bargaining with weighted voting: a characterization," Discussion Papers 2016-03, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    3. Alcalde, José & Dahm, Matthias, 2013. "Competition for procurement shares," Games and Economic Behavior, Elsevier, vol. 80(C), pages 193-208.
    4. Anton, James J. & Brusco, Sandro & Lopomo, Giuseppe, 2010. "Split-award procurement auctions with uncertain scale economies: Theory and data," Games and Economic Behavior, Elsevier, vol. 69(1), pages 24-41, May.
    5. José Alcalde & Matthias Dahm, "undated". "Supplier Diversity before the Time of Cholera," Discussion Papers in Economics 20/07, Division of Economics, School of Business, University of Leicester.
    6. James J. Anton & Sandro Brusco & Giuseppe Lopomo, 2007. "Coordination in Split-Award Auctions with Uncertain Scale Economies: Theory and Data," Department of Economics Working Papers 07-02, Stony Brook University, Department of Economics.
    7. Alcalde, José & Dahm, Matthias, 2020. "Affirmative Action Through Endogenous Set-Asides," QM&ET Working Papers 20-1, University of Alicante, D. Quantitative Methods and Economic Theory.
    8. Rosar, Frank & Mueller, Florian, 2014. "Negotiating cultures in corporate procurement," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100599, Verein für Socialpolitik / German Economic Association.
    9. Rosar, Frank & Mueller, Florian, 2015. "Negotiating cultures in corporate procurement," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 259-280.
    10. Jehiel, Philippe & Lamy, Laurent, 2014. "On discrimination in procurement auctions," CEPR Discussion Papers 9790, C.E.P.R. Discussion Papers.
    11. Johannes Münster, 2007. "Contests with investment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 849-862.
    12. Kaplan, Todd R. & Zamir, Shmuel, 2015. "Advances in Auctions," Handbook of Game Theory with Economic Applications,, Elsevier.
    13. Leandro Arozamena & Estelle Cantillon, 2004. "Investment Incentives in Procurement Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 1-18.
    14. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    15. Tomoeda, Kentaro, 2019. "Efficient investments in the implementation problem," Journal of Economic Theory, Elsevier, vol. 182(C), pages 247-278.
    16. Mats A. Bergman & David Granlund & Niklas Rudholm, 2017. "Squeezing the Last Drop Out of Your Suppliers: An Empirical Study of Market-Based Purchasing Policies for Generic Pharmaceuticals," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 969-996, December.
    17. Vivek Bhattacharya, 2021. "An Empirical Model of R&D Procurement Contests: An Analysis of the DOD SBIR Program," Econometrica, Econometric Society, vol. 89(5), pages 2189-2224, September.
    18. Bru, Lluís & Cardona, Daniel & Sákovics, József, 2023. "Block sourcing plus," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1130-1140.
    19. Merckx, Gilles & Chaturvedi, Aadhaar, 2020. "Short vs. long-term procurement contracts when supplier can invest in cost reduction," International Journal of Production Economics, Elsevier, vol. 227(C).
    20. Münster, Johannes, 2006. "Contests with Investment," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 120, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

    More about this item

    Keywords

    Split-award; Generalized second-price auctions; Investment;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:96:y:2012:i:1:p:188-197. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505578 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.