Procuring Substitutes with (Fine-Tuned) First-Price Auctions

LEANDRO AROZAMENA; FEDERICO WEINSCHELBAUM; ELMAR WOLFSTETTER

San Carlos de Bariloche

Congreso; LII Reunión Anual de la Asociación Argentina de Economía Política; 2017

AAEP y Universidad Nacional del Río Negro

Suppose a firm uses two inputs that are substitutes to generate outputaccording to a smooth production function. Each input is suppliedby a single contractor. The firm would like to make both suppliers competewith one another. However, since inputs are imperfect substitutes,it cannot resort to winner-take-all competition. We allow the firm to usea modified first-price auction. The procurer announces a demand functionsfor each input, each one of them depending on both suppliers' unitprice bids. Given those demands, contractors simultaneously bid unitprices and sell according to announced input demands. We show thatthe procurer has an incentive to announce demands that do not reflectits true production technology. The firm overstates input substitutabilityand understates its own willingness to pay so as to make the auction morecompetitive.