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Sequential Procurement With Subcontracting
Author(s) -
Gale Ian L.,
Hausch Donald B.,
Stegeman Mark
Publication year - 2000
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00093
Subject(s) - bidding , microeconomics , marginal cost , ex ante , procurement , reverse auction , economics , common value auction , business , industrial organization , management , macroeconomics
Two symmetric sellers are approached sequentially by fragmented buyers. Each buyer conducts a second‐price auction and purchases from the seller who offers the lower price. Winning an auction affects bidding for future contracts because the sellers have nonconstant marginal costs. We assume that the sellers are completely informed, and we study the unique equilibrium that survives iterated elimination of weakly dominated strategies. If subcontracting between the sellers is impossible, the final allocation of contracts is generally inefficient. If postauction subcontracting is possible, the sellers can be worse off, ex ante , than when subcontracting is impossible.