Document Type
Discussion Paper
Publication Date
9-1-2000
CFDP Number
1276
CFDP Pages
41
Abstract
We investigate firms’ incentives for cost reduction in the first price sealed bid auction, a format largely used for procurement. A central feature of the model is that we allow firms to be heterogeneous. Though private value first price auctions are not games with monotonic best responses, we find that for comparative statics purposes they behave like these games. In particular, firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants. Moreover, both auction formats tend to favor investment by the current market leader and are therefore likely to reinforce asymmetries among market participants.
Recommended Citation
Arozamena, Leandro and Cantillon, Estelle, "Investment Incentives in Procurement Auctions" (2000). Cowles Foundation Discussion Papers. 1529.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1529