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Inefficient Procurement

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  • Peter Postl

Abstract

We study the question whether procurement procedures that simultaneously determine specification and price of a good can result in an inefficient specification choice. Two suppliers can produce a good in either of two specifications, and both are equally good for the buyer. Costs are interdependent and unknown at the time of bidding. Each supplier receives two signals about production cost, one per specification. I show that if the winning bidder is selected purely on the basis of price and irrespective of the specification, there is a strictly positive chance of obtaining the specification with the highest cost of production. The setup studied here corresponds to the non-generic case in which an efficient and incentive compatible mechanism exists (Jehiel and Moldovanu (Econometrica 2001), but it requires the buyer to pay an extortionate price.

Suggested Citation

  • Peter Postl, 2006. "Inefficient Procurement," Discussion Papers 06-07, Department of Economics, University of Birmingham.
    • Handle: RePEc:bir:birmec:06-07
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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