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Preferred Suppliers and Vertical Integration in Auction Market

  • Roberto Burguet
  • Martin K. Perry

We consider a model of preference in an asymmetric procurement auction with two suppliers. The buyer can award the contract to a preferred supplier at the bid of a competing supplier. As such, the preferred supplier has a right-of-first-refusal. The preferred supplier may be an independent firm who has paid for the preference or may be a subsidiary of the buyer. Preference creates an allocative distortion that is qualitatively different than the distortion that arises in an asymmetric first-price auction. For a family of power distributions on the costs, we examine the effects of preference on the expected price paid by the buyer. If the buyer is not compensated for the preference, the expected price in the preference auction will be higher than either an efficient auction or a first-price auction. However, if the buyer can sell preference in a pre-auction, the net expected price will always be lower than an efficient auction, or even the first-price auction. The stronger supplier with the more favorable cost distribution has a greater willingness to pay for preference, and will outbid the weaker supplier to acquire the preference in the pre-auction. Similarly, the buyer can lower the net expected price by acquiring the stronger supplier as a preferred subsidiary.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 74.

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Date of creation: Dec 2003
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Handle: RePEc:bge:wpaper:74
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  1. Burguet Roberto & Perry Martin K, 2007. "Bribery and Favoritism by Auctioneers in Sealed-Bid Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-27, June.
  2. Leandro Arozamena & Estelle Cantillon, 2004. "Investment Incentives in Procurement Auctions," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 1-18, 01.
  3. Estelle Cantillon, 2008. "The effect of bidders' asymmetries on expected revenue in auctions," ULB Institutional Repository 2013/9001, ULB -- Universite Libre de Bruxelles.
  4. 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.
  5. 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.
  6. Waehrer, Keith, 1999. "Asymmetric private values auctions with application to joint bidding and mergers," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 437-452, April.
  7. Martimort, David, 1994. "Exclusive Dealing, Common Agency and Multiprincipals Incentive Theory," IDEI Working Papers 43, Institut d'Économie Industrielle (IDEI), Toulouse, revised 1996.
  8. Waehrer, Keith & Perry, Martin K, 2003. " The Effects of Mergers in Open-Auction Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 287-304, Summer.
  9. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
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