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Is the newcomer more aggressive when the incumbent is granted a Right-of-First-Refusal in a procurement auction? Experimental Evidence

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  • Karine Brisset
  • François Cochard
  • François Maréchal

Abstract

In this paper, we run a laboratory experiment to compare two mechanisms in a procurement setting: Right-of-First-Refusal (ROFR) where the incumbent supplier is granted a privileged position versus standard First-Price-Auction (FPA). To this end, we have subjects compete against a computerized agent programmed to behave in a risk-neutral way (i) in a FPA, and (ii) in a ROFR auction where the “incumbent” bidder is the computer. In contrast with theory, we observe that on average bidders are slightly but significantly more aggressive under the ROFR when their costs are such that they are predicted to behave identically under both auction procedures. For the sub-sample of subjects for whom we can estimate a CRRA parameter, we confirm the theoretical prediction that the buyer’s expected cost is larger in the ROFR if the newcomer is not sufficiently risk-averse. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Karine Brisset & François Cochard & François Maréchal, 2015. "Is the newcomer more aggressive when the incumbent is granted a Right-of-First-Refusal in a procurement auction? Experimental Evidence," Theory and Decision, Springer, vol. 78(4), pages 639-665, April.
    • Handle: RePEc:kap:theord:v:78:y:2015:i:4:p:639-665
    DOI: 10.1007/s11238-014-9438-z
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    References listed on IDEAS

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    1. Roberto Burguet & Martin K. Perry, 2009. "Preferred suppliers in auction markets," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 283-295, June.
    2. 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.
    3. Roman M. Sheremeta, 2011. "Contest Design: An Experimental Investigation," Economic Inquiry, Western Economic Association International, vol. 49(2), pages 573-590, April.
    4. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1407-1424, November.
    5. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    6. 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.
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    Cited by:

    1. March, Christoph, 2019. "The behavioral economics of artificial intelligence: Lessons from experiments with computer players," BERG Working Paper Series 154, Bamberg University, Bamberg Economic Research Group.
    2. Sylvain Béal & Sylvain Ferrières & Philippe Solal, 2022. "The priority value for cooperative games with a priority structure," International Journal of Game Theory, Springer;Game Theory Society, vol. 51(2), pages 431-450, June.
    3. March, Christoph, 2021. "Strategic interactions between humans and artificial intelligence: Lessons from experiments with computer players," Journal of Economic Psychology, Elsevier, vol. 87(C).
    4. Lars Isenhardt & Stefan Seifert & Silke Hüttel, 2023. "Tenant Favoritism and Right of First Refusals in Farmland Auctions: Competition and Price Effects," Land Economics, University of Wisconsin Press, vol. 99(2), pages 302-324.
    5. Isenhardt, Lars & Seifert, Stefan & Hüttel, Silke, 2021. "On the price effect of a right of first refusal in farmland auctions," 61st Annual Conference, Berlin, Germany, September 22-24, 2021 317062, German Association of Agricultural Economists (GEWISOLA).

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    More about this item

    Keywords

    Experimental procurement auction; Right-of-First-Refusal; First-price reverse auction; Risk-aversion; D44; C92; D81;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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