Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98382
Authors: 
Engel, Eduardo
Fischer, Ronald
Galetovic, Alexander
Year of Publication: 
2002
Series/Report no.: 
Center Discussion Paper 844
Abstract: 
In many circumstances, a principal, who wants prices to be as low as possible, must contract with agents who would like to charge the monopoly price. This paper compares a Demsetz auction, which awards an exclusive contract to the agent bidding the lowest price (competition for the field) with having two agents provide the good under (imperfectly) competitive conditions (competition in the field). We obtain a simple sufficient condition showing unambiguously which option is best. The condition depends only on the shapes of the surplus function of the principal and the profit function of agents, and is independent of the particular duopoly game played ex post. We apply this condition to three canonical examples procurement, royalty contracts and dealerships and find that whenever marginal revenue for the final good is decreasing in the quantity sold, a Demsetz auction is best. Moreover, a planner who wants to maximize social surplus also prefers a Demsetz auction.
Subjects: 
Demsetz auction
double marginalization
franchising
joint vs. separate auctions
monopoly
procurement
dealerships
royalty contracts
JEL: 
D44
L12
L92
Document Type: 
Working Paper

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