Procurement with specialized firms

TY - JOUR

T1 - Procurement with specialized firms

AU - Boone, Jan

AU - Schottmüller, Christoph

PY - 2016/9/1

Y1 - 2016/9/1

N2 - 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.

AB - 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.

KW - Faculty of Social Sciences

KW - procurement

KW - specialized firms

KW - deregulation

KW - countervailing incentives

U2 - 10.1111/1756-2171.12143

DO - 10.1111/1756-2171.12143

M3 - Journal article

SN - 0741-6261

VL - 47

SP - 661

EP - 687

JO - RAND Journal of Economics

JF - RAND Journal of Economics

IS - 3

ER -