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

  • Karine Brisset

    ()

    (CRESE, Université de Franche-comté)

  • François Cochard

    ()

    (CRESE, Université de Franche-comté)

  • François Maréchal

    ()

    (CRESE, Université de Franche-comté)

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.

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File URL: http://crese.univ-fcomte.fr/WP-2012-03.pdf
File Function: First version, 2012
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Paper provided by CRESE in its series Working Papers with number 2012-03.

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Length: 18 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:crb:wpaper:2012-03
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  1. Paul Klemperer, 1999. "Auction Theory: A Guide to the Literature," Microeconomics 9903002, EconWPA.
  2. Grosskopf, Brit & Roth, Alvin E., 2009. "If You are Offered the Right of First Refusal, Should You Accept? An Investigation of Contract Design," Scholarly Articles 4261988, Harvard University Department of Economics.
  3. 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.
  4. 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.
  5. 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.
  6. Biais, Bruno & Bossaerts, Peter, 1998. "Asset Prices and Trading Volume in a Beauty Contest," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 307-40, April.
  7. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1407-1424, November.
  8. 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.
  9. Shachat, Jason, 2009. "Procuring Commodities: Request for Quote or Reverse Auctions?," MPRA Paper 13418, University Library of Munich, Germany.
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