Skip to main content Accessibility help
×
Hostname: page-component-848d4c4894-jbqgn Total loading time: 0 Render date: 2024-06-20T14:41:00.892Z Has data issue: false hasContentIssue false

11 - Investment incentives in auctions: an experiment

Published online by Cambridge University Press:  04 December 2009

Jeroen Hinloopen
Affiliation:
Universiteit van Amsterdam
Hans-Theo Normann
Affiliation:
Royal Holloway, University of London
Get access

Summary

We experimentally analyze first- and second-price procurement auctions where one bidder can achieve a comparative cost advantage by investment prior to the auction. Theory predicts that bidders invest more often prior to second-price auctions than prior to first-price auctions, which is clearly confirmed by our experimental data. Bidding in the auction (after investment) is more aggressive than the equilibrium prediction in both auction formats.

Introduction

Different market institutions provide different incentives for firms to engage in activities that affect their competitive positions. For example, prior to a procurement auction investments can be made either to reduce a firm's own cost of production, or even to raise the cost of possible competitors. Empirical evidence indicates that companies make use of this possibility extensively. Thus, both auction rules and investment incentives have to be accounted for when it comes to comparing revenue and efficiency of selling (or buying) institutions.

A number of papers theoretically analyze investment incentives in procurement auctions. Most of them assume that investment decisions are not observable prior to a competition. Then, a typical finding is that investment is symmetric so that revenue equivalence between market institutions is preserved also in a model that allows for investment. This is not necessarily true if investment is observable. If firms strategically react to the decisions made at the investment stage, it is not immediately clear whether ex ante symmetry implies symmetric investment.

Type
Chapter
Information
Publisher: Cambridge University Press
Print publication year: 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Arozamena, L. and Cantillon, E. (2004), Investment Incentives in Procurement Auctions, Review of Economic Studies 71, 1–18.CrossRefGoogle Scholar
Bag, P. (1997). Optimal Auction Design and R & D, European Economic Review 41, 1655–1674.CrossRefGoogle Scholar
Cox, J. C., Isaac, R. M., Cech, P.-A. and Conn, D. (1996), Moral Hazard and Adverse Selection in Procurement Contracting, Games and Economic Behavior 17, 147–176.CrossRefGoogle Scholar
Silva, D., Dunne, T. and Kosmopolou, G. (2003), An Empirical Analysis of Entrant and Incumbent Bidding in Road Constructions Auctions, Journal of Industrial Economics 3, 295–316.CrossRefGoogle Scholar
Fischbacher, U. (2007), Z-tree Zurich Toolbox for Readymade Experiments, Experimental Economics 10 (2), 171–178.CrossRefGoogle Scholar
Grimm, V. (2006), Sequential versus Bundle Auction for Recurring Procurement, University of Cologne Working Paper.
Güth, W., Ivanova–Stenzel, R., and Wolfstetter, E. (2005), Bidding behavior in asymmetric auctions: An experimental study, European Economic Review 49, 1891–1913.CrossRefGoogle Scholar
Kagel, J. H. (1995), Auctions: A Survey of Experimental Research, in Kagel, J. and Roth, A. E. (eds.) Handbook of Experimental Economics, Princeton, NJ.Google Scholar
Maskin, E. and Riley, J. (2000). Asymmetric Auctions, Review of Economic Studies 67, 439–454.CrossRefGoogle Scholar
Myerson, R. (1981), Optimal Auction Design, Mathematics of Operations Research 6, 58–73.CrossRefGoogle Scholar
Piccone, M. and Tan, G. (1996), Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions, International Economic Review 37, 663–685.CrossRefGoogle Scholar
Tan, G. (1992), Entry and R&D in Procurement Contracting, Journal of Economic Theory 58, 41–60.CrossRefGoogle Scholar

Save book to Kindle

To save this book to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×