Sequential Procurement of a Long-Term Project

Huseyin Yildirim

No 02-35, Working Papers from Duke University, Department of Economics

Abstract: This paper deals with the optimal procurement of a long term project whose full return is to be received upon completion. The project consists of several subprojects to be auctioned off in a sequence. In equilibrium, I find that: (1) Even though the procurer lacks long term commitment power, both the procurer and suppliers strictly prefer the project to move forward; (2) unlike the static setting, the procurer's optimal strategy depends on the number of suppliers and more importantly, it is nonmonotonic. As one more supplier participates in the procurement auction, the procurer softens competition in the initial stages by including more cost "types" while increasing competition in the mature stages; (3) this, in turn, implies that existing suppliers might favor participation of additional suppliers; (4) the procurer prefers to deal with long-sighted suppliers only if the project is sufficiently long. Otherwise, short-term projects are better matched with short-sighted suppliers.

JEL-codes: D44 D82 H57 (search for similar items in EconPapers)
Date: 2002
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