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The Value of a Right of First Refusal Clause in a Procurement First-Price Auction

Author

Listed:
  • Karine Brisset

    () (CRESE, Université de Franche-comté)

  • François Cochard

    () (CRESE, Université de Franche-comté)

  • François Maréchal

    () (CRESE, Université de Franche-comté)

Abstract

In a procurement first-price sealed-bid auction with risk-averse suppliers, we determine the conditions under which the buyer has an incentive to grant a supplier a right of first refusal. We show that this clause can lower the buyer’s expected cost when suppliers (the incumbent and new suppliers) are risk-neutral or slightly risk-averse. We also show that the incumbent’s expected utility is higher when he is granted a right of first refusal than when he competes under a first-price auction. So, this clause may benefit both the buyer and the favored supplier.

Suggested Citation

  • Karine Brisset & François Cochard & François Maréchal, 2012. "The Value of a Right of First Refusal Clause in a Procurement First-Price Auction," Working Papers 2012-03, CRESE.
  • Handle: RePEc:crb:wpaper:2012-03
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    File URL: http://crese.univ-fcomte.fr/WP-2012-03.pdf
    File Function: First version, 2012
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    References listed on IDEAS

    as
    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. 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.
    3. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071, August.
    4. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-286, July.
    5. Grosskopf, Brit & Roth, Alvin E., 2009. "If you are offered the Right of First Refusal, should you accept? An investigation of contract design," Games and Economic Behavior, Elsevier, vol. 65(1), pages 176-204, January.
    6. Bruno Biais & Peter Bossaerts, 1998. "Asset Prices and Trading Volume in a Beauty Contest," Review of Economic Studies, Oxford University Press, vol. 65(2), pages 307-340.
    7. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1407-1424, November.
    8. 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.
    9. Hayley H. Chouinard, 2005. "Auctions with and without the Right of First Refusal and National Park Service Concession Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 1083-1088.
    10. Shachat, Jason, 2009. "Procuring Commodities: Request for Quote or Reverse Auctions?," MPRA Paper 13418, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

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    1. repec:bpj:bejtec:v:18:y:2018:i:1:p:21:n:20 is not listed on IDEAS

    More about this item

    Keywords

    auctions; right of first refusal; risk-aversion;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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