Dynamics in Non-Binding Procurement Auctions with Boundedly Rational Bidders

Domenico Colucci, Nicola Doni () and Vincenzo Valori

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: We study a procurement auction recently analysed by Gal-Or et al. (2007). In this auction game the buyer ranks different bids on the basis of both the prices submitted and the quality of each bidder that is her private information. We emphasise the similarity between this model and existing models of competition in horizontally differentiated markets. Finally we illustrate conditions for the existence and the stability of such equilibrium. To this end we extend the model to a dynamic setting in which a sequence of independent auctions takes place. We assume bidders have bounded rationality in a twofold sense. On one hand, they use an underparametrized model of their competitors’ behaviour, best responding to expectations on average bids rather than keeping track of the entire vector of competitors’ bids. On the other they update expectations adaptively. In a general framework with more than two bidders the system may fail to converge to the steady state, i.e. to the symmetric Nash equilibrium of the original game.

Keywords: Non-binding auctions; Product differentiation; Hotelling Duopoly; Expectations; Stability of steady states (search for similar items in EconPapers)
JEL-codes: C62 D43 D44 D83 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2009
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Working Paper: Dynamics in Non-Binding Procurement Auctions with Boundedly Rational Bidders (2009)
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