Document Type
Discussion Paper
Publication Date
4-1-2002
CFDP Number
1358
CFDP Revision Date
2007-07-01
CFDP Pages
19
Abstract
A principal, who wants prices to be as low as possible, contracts with agents who would like to charge the monopoly price. The principal chooses between a Demsetz auction, which awards an exclusive contract to the agent bidding the lowest price (competition for the field) and 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, the principal prefers a Demsetz auction. Moreover, a planner who wants to maximize social surplus also prefers a Demsetz auction.
Recommended Citation
Engel, Eduardo; Fischer, Ronald; and Galetovic, Alexander, "Competition in or for the Field: Which Is Better?" (2002). Cowles Foundation Discussion Papers. 1622.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1622