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Procurement with specialized firms
Author(s) -
Boone Jan,
Schottmüller Christoph
Publication year - 2016
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12143
Subject(s) - procurement , distortion (music) , industrial organization , business , common value auction , microeconomics , quality (philosophy) , mechanism design , welfare , agency (philosophy) , mechanism (biology) , information asymmetry , economics , computer science , marketing , market economy , amplifier , philosophy , bandwidth (computing) , epistemology , computer network
We analyze optimal procurement mechanisms when firms are specialized. The procurement agency has incomplete information concerning the firms' cost functions and values high quality as well as low price. Lower type firms are cheaper (more expensive) than higher type firms when providing low (high) quality. With specialized firms, distortion is limited and a mass of types earns zero profits. The optimal mechanism can be inefficient: types providing lower second‐best welfare win against types providing higher second‐best welfare. As standard scoring rule auctions cannot always implement the optimal mechanism, we introduce a new auction format implementing the optimal mechanism.