Auctions versus Negotiations

Fabian Herweg () and Klaus Schmidt ()

No 12, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, a scoring auction implements the efficient allocation. If this is not feasible, the buyer must choose between a price-only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is particularly costly, and if the buyer\'s bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements.

Keywords: Adaptation costs; auctions; behavioral contract theory; loss aversion; negotiations; procurement; renegotiation (search for similar items in EconPapers)
JEL-codes: D03 D82 D83 H57 (search for similar items in EconPapers)
Date: 2017-03-25
New Economics Papers: this item is included in nep-com, nep-cta, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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