Sequential procurement auctions and their effect on investment decisions
Author(s)Figueroa, Nicolás; Cisternas Leyton, Gonzalo Sebastian
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We characterize the optimal mechanism and investment level in an environment where (i) two projects of independent costs are purchased sequentially, (ii) the buyer can commit to a two-period mechanism, and (iii) the winner of the first project can invest in a cost-reducing technology between auctions. We show that, in an attempt to induce more competition in the first period, the optimal mechanism gives an advantage to the first-period winner in the second auction. As a result of this advantage, the first-period winner invests more than the socially efficient level. Optimal advantages, therefore, create two different channels for cost minimization in buyer-supplier relationships.
The RAND Journal of Economics
Cisternas, Gonzalo, and Nicolás Figueroa. “Sequential Procurement Auctions and Their Effect on Investment Decisions.” The RAND Journal of Economics 46, no. 4 (October 2015): 824–843.