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Competition In or For the Field: Which Is Better?

Author

Listed:
  • Eduardo Engel

    (Cowles Foundation)

  • Ronald Fischer

    (University of Chile)

  • Alexander Galetovic

    (University of Chile)

Abstract
A principal, who wants prices to be as lowas possible, contracts with agents who would like to charge the monopoly price. The principal chooses between a Demsetz auction, which awards an exclusive contract to the agent bidding the lowest price (competition for the field) and 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, the principal prefers a Demsetz auction. Moreover, a planner who wants to maximize social surplus also prefers a Demsetz auction.

Suggested Citation

  • Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2002. "Competition In or For the Field: Which Is Better?," Cowles Foundation Discussion Papers 1358, Cowles Foundation for Research in Economics, Yale University, revised Jul 2007.
    • Handle: RePEc:cwl:cwldpp:1358
    as

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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d13/d1358.pdf
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    References listed on IDEAS

    as
    1. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October.
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    7. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2000. "How to Auction an Essential Facility when Underhand Integration is Possible," Documentos de Trabajo 79, Centro de Economía Aplicada, Universidad de Chile.
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    Cited by:

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    2. Athias, Laure & Nunez, Antonio, 2008. "The more the merrier? Number of bidders, information dispersion, renegotiation and winner’s curse in toll road concessions," MPRA Paper 10539, University Library of Munich, Germany.

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    More about this item

    Keywords

    Demsetz auction; Double marginalization; Franchising; Joint vs. separate auctions; Monopoly; Procurement; Dealerships; Royalty contracts;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation

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