Efficient Competition with Small Numbers - with Applications to Privatisation and Mergers
This paper studies competition between a small number of suppliers and a single buyer, (or an auction with a small number of bidders and a single seller) when total demand (supply) is uncertain. It is well known that when a small number of suppliers compete in supply functions the service is not provided efficiently. We show that production efficiency is obtained if suppliers compete in simple two-part bid functions. However, profits are not eliminated. Moreover, the buyers´ (sellers´) decision regarding how much to buy is not efficient. We also show that suppliers (bidders in an auction) always have an incentive to merge (form bidding rings) in this setting.
|Date of creation:||Jan 1999|
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