Sequential Procurement with Subcontracting

Ian L Gale, Donald B Hausch and Mark Stegeman

International Economic Review, 2000, vol. 41, issue 4, 989-1020

Abstract: Two symmetric sellers are approached sequentially by fragmented buyers. Each buyer conducts a second-price auction and purchases from the seller who offers the lower price. Winning an auction affects bidding for future contracts because the sellers have nonconstant marginal costs. We assume that the sellers are completely informed, and we study the unique equilibrium that survives iterated elimination of weakly dominated strategies. If subcontracting between the sellers is impossible, the final allocation of contracts is generally inefficient. If postauction subcontracting is possible, the sellers can be worse off, ex ante, than when subcontracting is impossible. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2000
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