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Competition in or for The Field: Which is Better?

Author

Listed:
  • Eduardo Engel
  • Ronald Fischer
  • Alexander Galetovic

Abstract

In many circumstances, a principal, who wants prices to be as low as possible, must contract with agents who would like to charge the monopoly price. This paper compares a Demsetz auction, which awards an exclusive contract to the agent bidding the lowest price (competition for the field) with having two agents provide the good under (imperfectly) competitive conditions (competition in the field). We obtain a simple sufficient condition showing unambiguously which option is best. The condition depends only on the shapes of the surplus function of the principal and the profit function of agents, and is independent of the particular duopoly game played ex post. We apply this condition to three canonical examples-procurement, royalty contracts and dealerships-and find that whenever marginal revenue for the final good is decreasing in the quantity sold, a Demsetz auction is best. Moreover, a planner who wants to maximize social surplus also prefers a Demsetz auction.

Suggested Citation

  • Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2002. "Competition in or for The Field: Which is Better?," Documentos de Trabajo 115, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:115
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    References listed on IDEAS

    as
    1. Caillaud, Bernard & Tirole, Jean, 2004. "Essential facility financing and market structure," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 667-694, March.
    2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2000. "How to Auction an Essential Facility when Underhand Integration is Possible," Documentos de Trabajo 79, Centro de Economía Aplicada, Universidad de Chile.
    3. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2001. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 993-1020, October.
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    8. Harstad, Ronald M & Crew, Michael A, 1999. "Franchise Bidding without Holdups: Utility Regulation with Efficient Pricing and Choice of Provider," Journal of Regulatory Economics, Springer, vol. 15(2), pages 141-163, March.
    9. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
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    Cited by:

    1. Daniela Saban & Gabriel Y. Weintraub, 2021. "Procurement Mechanisms for Assortments of Differentiated Products," Operations Research, INFORMS, vol. 69(3), pages 795-820, May.
    2. Athias, Laure & Nunez, Antonio, 2008. "The more the merrier? Number of bidders, information dispersion, renegotiation and winner’s curse in toll road concessions," MPRA Paper 10539, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation

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