Bundled Procurement for (Free) Technology Acquisition and Future Gain

Abstract

Consider a buyer who would like to procure certain products for the current period and the underlying technologies so that he can become a supplier and compete with current suppliers in the future market. One potential procurement mechanism for such a buyer is to bundle the procurement project with technology acquisition. We propose a dynamic stochastic game-theoretic model that analyzes the optimal technology offer strategies of the asymmetric suppliers and highlights how the size of the current project, relative to the size of the future market, and supplier competition determine the effectiveness of the bundled procurement mechanism for the buyer. For the two-supplier case, we find that each supplier has a dominant technology offer strategy that is independent of opponent's strategy. When the relative size of the project is small, suppliers only offer obsolete technologies even if their technologies are perfect substitutes. While suppliers offer better technologies as the project size increases, their responses in technology offers are not continuous with respect to the project size --- once the project size reaches some threshold, suppliers' optimal responses jump to their best technologies. We also observe that the premium needed for technology acquisition under the bundled procurement mechanism can be negligible compared to the expected profit in the future market.