Sequential procurement auctions and their effect on investment decisions

Gonzalo Cisternas and Nicolás Figueroa

RAND Journal of Economics, 2015, vol. 46, issue 4, 824-843

Abstract: type="main">

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.

Date: 2015
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Working Paper: Sequential Procurement Auctions and Their Effect on Investment Decisions (2007)
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