Auctions versus negotiations: the effects of inefficient renegotiation

For the procurement of complex goods, the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, scoring auctions implement the efficient allocation. If this is not...

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Bibliographic Details
Published inThe Rand journal of economics Vol. 48; no. 3; pp. 647 - 672
Main Authors Herweg, Fabian, Schmidt, Klaus M.
Format Journal Article
LanguageEnglish
Published Santa Monica Wiley Subscription Services, Inc 01.10.2017
Rand Corporation
Subjects
Auctions
Bargaining power
Contract incentives
Contract negotiations
Contract renegotiations
Contracts
Corporations
Cost functions
Design efficiency
Economic theory
Incentives
Information dissemination
Information sharing
Negotiation
Negotiations
Procurement
Purchasing
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Summary:For the procurement of complex goods, the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, scoring auctions implement the efficient allocation. If this is not feasible, the buyer must choose between a price-only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is very costly, and if the buyer's bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements.
Bibliography:Financial support by Deutsche Forschungsgemeinschaft through SFB‐TRR 190 is gratefully acknowledged. We would like to thank the Editor (David Martimort), two anonymous referees, Michael Grubb, Magdalena Helfrich, Thomas Kittsteiner, Takeshi Murooka, Antonio Rosato, Steve Tadelis, and Cédric Wasser for very helpful comments and suggestions. Part of this research was conducted while Herweg visited University of Technology Sydney, and Herweg would like to thank the Business School for its hospitality.
ISSN:0741-6261
1756-2171
DOI:10.1111/1756-2171.12189