Endogenous Asymmetry in a Dynamic Procurement Auction

Abstract

We show how to numerically solve for a Markov-perfect equilibrium of a dynamic auction game where a procurer repeatedly purchases construction services from capacity-constrained firms. We find that the procurer is best off scheduling frequent auctions for small project sizes. Otherwise, firm capacity utilization rates become larger and more asymmetric, which softens competition and increases procurement costs. We also find that forward-looking bidding dampens the competition-softening effects of asymmetry: farsighted firms compete more intensely than myopic ones. This can undermine the goal of a bid-preference-style affirmative action program: more farsighted firms respond less to the asymmetry induced via bid preferences.

Publisher

Wiley-Blackwell

Publication Date

1-1-2012

Publication Title

RAND Journal of Economics

Department

Economics

Document Type

Article

DOI

https://dx.doi.org/10.1111/1756-2171.12006

Language

English

Format

text

Link to Full Text

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