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Competition for Procurement Contracts and Underinvestment

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  • Dasgupta, Sudipto

Abstract

A two-period model is considered in which ex ante identical firms invest in period one, and in period two, after they learn their costs, the lowest cost firm is chosen as the winner of the contract. It is found that even though firms are racing against one another, they end up underinvesting relative to the ex ante socially optimal levels when the buyer is unable to credibly precommit to the second period contract. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Dasgupta, Sudipto, 1990. "Competition for Procurement Contracts and Underinvestment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(4), pages 841-865, November.
    • Handle: RePEc:ier:iecrev:v:31:y:1990:i:4:p:841-65
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    Cited by:

    1. Robert H. Frank & Philip J. Cook, 2013. "Winner-Take-All Markets," Studies in Microeconomics, , vol. 1(2), pages 131-154, December.
    2. Qiang Fu & Qian Jiao & Jingfeng Lu, 2015. "Contests with endogenous entry," International Journal of Game Theory, Springer;Game Theory Society, vol. 44(2), pages 387-424, May.
    3. Cuihong Li & Laurens G. Debo, 2009. "Second Sourcing vs. Sole Sourcing with Capacity Investment and Asymmetric Information," Manufacturing & Service Operations Management, INFORMS, vol. 11(3), pages 448-470, July.
    4. Jingfeng Lu, 2010. "Entry Coordination And Auction Design With Private Costs Of Information Acquisition," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 274-289, April.
    5. Bag, Parimal Kanti, 1997. "Optimal auction design and R&D," European Economic Review, Elsevier, vol. 41(9), pages 1655-1674, December.
    6. Mantin, Benny & Veldman, Jasper, 2019. "Managing strategic inventories under investment in process improvement," European Journal of Operational Research, Elsevier, vol. 279(3), pages 782-794.
    7. Cuihong Li & Zhixi Wan, 2017. "Supplier Competition and Cost Improvement," Management Science, INFORMS, vol. 63(8), pages 2460-2477, August.
    8. Rosar, Frank & Mueller, Florian, 2014. "Negotiating cultures in corporate procurement," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100599, Verein für Socialpolitik / German Economic Association.
    9. Li, Ying & Gupta, Sudheer, 2011. "Strategic capability investments and competition for supply contracts," European Journal of Operational Research, Elsevier, vol. 214(2), pages 273-283, October.
    10. Cuihong Li, 2013. "Sourcing for Supplier Effort and Competition: Design of the Supply Base and Pricing Mechanism," Management Science, INFORMS, vol. 59(6), pages 1389-1406, June.
    11. William S. Lovejoy, 2006. "Optimal Mechanisms with Finite Agent Types," Management Science, INFORMS, vol. 52(5), pages 788-803, May.
    12. Cuihong Li, 2020. "Supplier Competition and Cost Reduction with Endogenous Information Asymmetry," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 996-1010, September.
    13. Rosar, Frank & Mueller, Florian, 2015. "Negotiating cultures in corporate procurement," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 259-280.
    14. Gonzalo Cisternas & Nicolás Figueroa, 2015. "Sequential procurement auctions and their effect on investment decisions," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 824-843, October.
    15. Merckx, Gilles & Chaturvedi, Aadhaar, 2020. "Short vs. long-term procurement contracts when supplier can invest in cost reduction," International Journal of Production Economics, Elsevier, vol. 227(C).
    16. Agastya, Murali & Feng, Xin & Lu, Jingfeng, 2023. "Auction design with shortlisting when value discovery is covert," Journal of Mathematical Economics, Elsevier, vol. 107(C).

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