Abstract
Sequential sealed first-price and open descending-price procurement auctions are studied. We examine which procurement auction rule achieves the low procurement cost. We show that the answer to this policy question depends on whether the items are complements or substitutes. With substitutes, the first-price procurement auction is preferred, while with complements, the open descending-price procurement auction is preferred. We also illustrate the procurement cost minimizing auction and the auction rule preferred by the bidders. With substitutes, bidders prefer the open descending-price procurement auction, while with complements bidders prefer the first-price procurement auction.
Highlights
Sequential sealed ...rst-price and open ascending bid auctions are studied
A number of papers have studied the robustness of the equivalence result to departures from the basic assumptions including risk-aversion, see Riley and Samuelson [1981], Matthews [1983], Maskin and Riley [1984], budget constraints, see Che and Gale [1998], positively correlated valuations, see Milgrom and Weber [1982], and bidder asymmetry, see Maskin and Riley [2000a]
Substitutes arise if the value of an additional item falls in the number of acquired items, while complements arise if the value increases in the number of acquired items
Summary
This section examines bidding behavior in standard auctions. We start with the second-price auction, and establish that there exists an e¢ cient equilibrium. FP w denote the ex ante expected second period rent for losing and winning bidder associated with the ...rst-price allocation rule,. There are two features of the equilibrium worth emphasizing: First, the sign of the dynamic mark-up under the ...rst-price auction coincides with the sign of the opportunity cost under the e¢ cient allocation rule. It is positive when the contracts are substitutes, and negative when the goods are complements. The dynamic mark-up is larger under the ...rst-price auction rule than under the e¢ cient second-price allocation rule: These features follow from the payo¤ inequalities in Lemma 1 and are explained by the strategic bid shading in ...rst-price auctions. We shall see that the ...rst period mark-up ranking plays a central role in determining the bidder’s rent and procurement cost ranking
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