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Investment incentives in procurement auctions

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  • Leandro Arozamena
  • Estelle Cantillon

Abstract

We investigate firms' incentives for cost reduction in the first price sealed bid auction, a format largely used for procurement. A central feature of the model is that we allow firms to be heterogeneous. Though private value first price auctions are not games with monotonic best responses, we find that for comparative statics purposes they behave like these games. In particular, firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants. Moreover, both auction formats tend to favor investment by the current market leader and are therefore likely to reinforce asymmetries among market participants.
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Suggested Citation

  • Leandro Arozamena & Estelle Cantillon, 2004. "Investment incentives in procurement auctions," ULB Institutional Repository 2013/9005, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:ulb:ulbeco:2013/9005
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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