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.
Arozamena, Leandro and Cantillon, Estelle, "Investment Incentives in Procurement Auctions" (2000). Cowles Foundation Discussion Papers. 1529.