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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.

Suggested Citation

  • Roberto Burguet & Martin K. Perry, 2003. "Preferred Suppliers and Vertical Integration in Auction Market," Working Papers 74, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:74

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    References listed on IDEAS

    1. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
    2. 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.
    3. David Martimort, 1996. "Exclusive Dealing, Common Agency, and Multiprincipals Incentive Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 1-19, Spring.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    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 125-142, February.
    9. Leandro Arozamena & Estelle Cantillon, 2004. "Investment Incentives in Procurement Auctions," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 1-18.
    10. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
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    Cited by:

    1. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "The effect of corruption on bidding behavior in first-price auctions," European Economic Review, Elsevier, vol. 53(6), pages 645-657, August.
    2. Arozamena, Leandro & Weinschelbaum, Federico, 2009. "Simultaneous vs. sequential price competition with incomplete information," Economics Letters, Elsevier, vol. 104(1), pages 23-26, July.
    3. repec:ebl:ecbull:v:4:y:2006:i:24:p:1-5 is not listed on IDEAS
    4. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1407-1424, November.

    More about this item


    right-of-first-refusal; preference; auction markets;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation


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