Working Paper: CEPR ID: DP2676
Authors: Leandro Arozamena; Estelle Cantillon
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 statistic 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 favour investment by the current market leader and are therefore likely to reinforce asymmetries among market participants.
Keywords: Asymmetric Auctions; Endogenous Distributions; Investment Incentives
JEL Codes: C70; D40; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| observable investment (C90) | lower investment in cost reduction (G31) |
| first price auction format (D44) | lower investment in cost reduction (G31) |
| first price auction format (D44) | fiercer competition (L13) |
| fiercer competition (L13) | reduced incentives for investment (G31) |
| second price auction format (D44) | unaffected bidding behavior (D44) |
| second price auction format (D44) | full capture of cost reduction benefits (D61) |
| first price auction format (D44) | less investment than second price auction (D44) |
| both auction formats (D44) | favor current market leader (L19) |
| both auction formats (D44) | reinforce existing market asymmetries (D43) |