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Procurement auctions and unit-price contracts


Ewerhart, Christian; Fieseler, Karsten (2003). Procurement auctions and unit-price contracts. RAND Journal of Economics, 34(3):569-581.

Abstract

In competitive procurement auctions, bids often have the form of unit-price contracts (UPCs). We show that optimal bidding behavior in UPC auctions is typically non-monotonic, and therefore may lead to inefficient allocations. However, UPC auctions may still be desirable for the buyer when compared to efficient mechanisms such as the first-price auction. In a UPC auction, low types are subsidized, and the resulting stronger competition reduces the winning bidder's informational rent, which overcompensates the efficiency loss.

Abstract

In competitive procurement auctions, bids often have the form of unit-price contracts (UPCs). We show that optimal bidding behavior in UPC auctions is typically non-monotonic, and therefore may lead to inefficient allocations. However, UPC auctions may still be desirable for the buyer when compared to efficient mechanisms such as the first-price auction. In a UPC auction, low types are subsidized, and the resulting stronger competition reduces the winning bidder's informational rent, which overcompensates the efficiency loss.

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27 citations in Web of Science®
24 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2003
Deposited On:15 Dec 2009 10:33
Last Modified:05 Apr 2016 13:32
Publisher:Wiley-Blackwell
ISSN:0741-6261
Publisher DOI:https://doi.org/10.2307/1593747
Official URL:http://www.jstor.org/stable/1593747?&Search=yes&term=unit-price&term=auctions&term=contracts&term=procurement&list=hide&searchUri=%2Faction%2FdoBasicSearch%3FQuery%3Dprocurement%2Bauctions%2Band%2Bunit-price%2Bcontracts%26jc%3Dj100748%26wc%3Don&item=1&ttl

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