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Auctions vs. Negotiations: The Case of Favoritism

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  • Wambach, Achim
  • Gretschko, Vitali

Abstract

We compare two commonly used mechanisms in procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer s preferences and may collude with one of the sellers. We provide a precise definition of both mechanisms and show contrary to conventional wisdom that an intransparent negotiation yields a higher buyer surplus than a transparent auction for a range of parameters. In particular, for small expected punishments there exists a lower and an upper bound on the number of sellers such that the negotiation yields a higher buyer surplus with a probability arbitrary close to 1 in the parameter space. Moreover, if the expected punishment is small, the negotiation is always more efficient and generates a higher surplus for the sellers.

Suggested Citation

  • Wambach, Achim & Gretschko, Vitali, 2013. "Auctions vs. Negotiations: The Case of Favoritism," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79774, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc13:79774
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    References listed on IDEAS

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    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.
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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