Procurement with Specialized Firms
TILEC Discussion Paper No. 2011-054
CentER Discussion Paper No. 2011-131
37 Pages Posted: 1 Dec 2011
There are 2 versions of this paper
Procurement with Specialized Firms
Procurement with Specialized Firms
Date Written: November 30, 2011
Abstract
This paper analyzes optimal procurement mechanisms in a setting where the procurement agency has incomplete information concerning the firms’ cost functions and cares about quality as well as price. Low type firms are cheaper than high type firms in providing low quality but more expensive when providing high quality. Hence, each type is specialized in a certain quality level. We show that this specialization leads to a bunching of types on profits, i.e. a range of firms with different cost functions receives zero profits and therefore no informational rents. If first best welfare is monotone in the efficiency parameter, the optimal mechanism can be implemented by a simple auction. If first best welfare is U-shaped in type, the optimal mechanism is not efficient in the sense that types providing a lower second best welfare win against types providing a higher second best welfare.
Keywords: procurement, specialization, deregulation
JEL Classification: H75, L51
Suggested Citation: Suggested Citation
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