Ratifiability of Efficient Collusive Mechanisms in Second-Price Auctions with Participation Costs

We investigate whether efficient collusive bidding mechanisms are affected by potential information leakage from bidders' decisions to participate in them within the independent private values setting. We apply the concept of ratifiability introduced by Cramton and Palfrey (1995) and show that when the seller uses a second-price auction with participation costs, the standard efficient cartel mechanisms such as preauction knockouts analyzed in the literature will not be ratified by cartel members. A high-value bidder benefits from vetoing the cartel mechanism since doing so sends a credible signal that she has high value, which in turn discourages other bidders from bidding in the seller's auction.Auctions, collusion, ratifiability

Monopoly Provision of Product Warranties

This article considers the problem of monopoly provision of product warranties when consumers are heterogeneous and when the probability of product malfunction depends on both the quality of the product and on the consumers' care. The optimal warranty contract is characterized to maximize the expected profit for the monopolistic seller. The properties of the optimal contract depend on the nature of the product. If the quality of the product is more important as a determinant of reliability than consumer care then standard results are obtained; that is, a positive correlation between warranties and reliability and between price and reliability are observed, and higher type buyers buy more expensive versions of the product with higher warranties. On the other hand, if consumer care is more important in increasing reliability, the results are exactly opposite; for example, there is a negative correlation between warranty coverage and reliability. Also, when consumer care is important, higher type buyers buy versions of the product with lower warranty and lower quality. Other features of the optimal warranty contract are also characterized in this paper

Incentive Procurement Contracts with Costly R&D

This paper provides a model of both R&D and production in procurement processes where firms invest in R&D and compete for a government procurement contract. The optimal incentive procurement contract is characterized to maximize the government's expected welfare. Explicit consideration of the R&D process changes the standard results in several ways. If the traditional Baron-Myerson (1982) type contract is used where there is costly R&D, the government buys too little from the contractor and pays too little. Raising the price paid encourages private R&D and raises the government's welfare. The form of the optimal procurement contract depends on the number of firms. With R&D and optimal procurement the government prefers more than one firm to invest in R&D and to bid for the production contract. But too much competition may discourage private R&D investment and leave the government worse off. Other features of optimal procurement and R&D expenditures are also discussed

Bidding Rings and the Winner's Curse: The Case of Federal Offshore Oil and Gas Lease Auctions

This paper extends the theory of legal cartels to affiliated private value and common value environments, and applies the theory to explain joint bidding patterns in U.S. federal government offshore oil and gas lease auctions. We show that efficient collusion is always possible in private value environments, but may not be in common value environments. In the latter case, fear of the winner's curse can cause bidders not to bid, which leads to inefficient trade. Buyers with high signals may be better off if no one colludes. The bid data is consistent with oil and gas leases being common value assets, and with the prediction that the winner's curse can prevent rings from forming on marginal tracts.

Joint Bidding in Federal Offshore Oil and Gas Lease Auctions

This paper provides an explanation for why cartels are not observed frequently in mineral-rights auctions even though it was not illegal for them to form. We use the techniques of mechanism design to characterize the efficient, incentive compatible cartel and show that it can be implemented by a first-price knockout tournament with information sharing. We show, however, that bidders with the highest signals typically prefer to bid alone rather than join the cartel. We examine bid data from federal offshore oil and gas auctions for evidence that cartels used bid coordination schemes. We also examine the determinants of joint bidding.

Endogenous Coalition Formation in Rivalry

This paper studies endogenous coalition formation in an environment where continuing conflict exists. A number of players compete for an indivisible prize and the probability of winning for a player depends on his initial resource as well as the distribution of initial resources among the other players. Players can pool their resources together to increase their probabilities of winning through coalition formation. If a coalition wins, the players in the coalition will further compete and possibly form new coalitions. The game continues until one individual winner is left. We determine subgame perfect equilibria for the game of three or four players and provide conditions under which the equilibrium coalition structures involve a balance of power. We also illustrate that there can be no equilibrium coalition structure. Our analysis sheds some lights on problems of temporary cooperation among heterogeneous individuals who are rivals in nature.Coalition formation,Conflicts,Rivalry

Incentive Procurement Contracts with Costly R&D

This paper provides a model of both R&D and production in procurement processes where firms invest in R&D and compete for a government procurement contract. The optimal incentive procurement contract is characterized to maximize the government's expected welfare. Explicit consideration of the R&D process changes the standard results in several ways. If the traditional Baron-Myerson (1982) type contract is used where there is costly R&D, the government buys too little from the contractor and pays too little. Raising the price paid encourages private R&D and raises the government's welfare. The form of the optimal procurement contract depends on the number of firms. With R&D and optimal procurement the government prefers more than one firm to invest in R&D and to bid for the production contract. But too much competition may discourage private R&D investment and leave the government worse off. Other features of optimal procurement and R&D expenditures are also discussed

Monopoly Provision of Product Warranties

This article considers the problem of monopoly provision of product warranties when consumers are heterogeneous and when the probability of product malfunction depends on both the quality of the product and on the consumers' care. The optimal warranty contract is characterized to maximize the expected profit for the monopolistic seller. The properties of the optimal contract depend on the nature of the product. If the quality of the product is more important as a determinant of reliability than consumer care then standard results are obtained; that is, a positive correlation between warranties and reliability and between price and reliability are observed, and higher type buyers buy more expensive versions of the product with higher warranties. On the other hand, if consumer care is more important in increasing reliability, the results are exactly opposite; for example, there is a negative correlation between warranty coverage and reliability. Also, when consumer care is important, higher type buyers buy versions of the product with lower warranty and lower quality. Other features of the optimal warranty contract are also characterized in this paper

Entry and R & D Costs in Competitive Procurements and Contracting

A model of competitive procurements and contracting is presented. The key features of the model include pre-contract R&D, an endogenous number of symmetric firms, and a first-price sealed-bid procurement auction. The unique symmetric perfect free-entry equilibrium is characterized. If the R&D technology is variable scale with constant marginal returns, it is socially optimal for one firm to do all of the R&D and production. However, since the buyer considers only his own cost of procurement, the buyer will prefer to allow free entry, and the number of firms will usually be larger than is socially optimal. If the R&D technology is fixed-scale, the buyer's choices will be socially optimal if the buyer's opportunity cost of an alternative procurement is high. On the other hand, if the opportunity cost is low the buyer will choose a reservation price lower than the socially optimal value and a number of firms no larger than the socially optimal number. Certainly, the type of R&D technology plays an important role in determining optimal R&D and procurement policies for the buyer and for society

Platform Competition: The Role of Multi-homing and Complementors

In this paper we present a model of platform competition in which two firms offer horizontally differentiated platforms and a group of complementors offers products that are complementary to each platform. Consumers can buy either or both platforms (single- or multihoming) and complementors can produce for either or both platforms (single- or multi-production). We first characterize the pricing structure and find that, in equilibrium, consumers are more likely to multihome as the differentiation of platforms decreases or as the number of complementors for either platform increases. We show that the platform and its complementors always benefit from an increase in the number of complementors in their own platform. When single-homing arises in equilibrium, the platform and its complementors suffer from an increase in the number of complementors in the rival platform. We also study the incentives of the platform to integrate with its complementors, to charge them a royalty or give a subsidy, and to sell its own complementary products to the rival platform