Competition in or for the Field: Which is Better?

Eduardo M.R.A. Engel (), Ronald David Fischer and Alexander Galetovic

No 8869, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D44 L12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lam and nep-mic
Date: 2002-04
Note: IO
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Related works:
Working Paper: Competition In Or For The Field: Which Is Better? (2002)
Working Paper: Competition In or For the Field: Which Is Better? (2002)
Working Paper: Competition In or For the Field: Which is Better (2002)
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