COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1358 COMPETITION IN OR FOR THE FIELD: WHICH IS BETTER? Eduardo Engel, Ronald Fischer and Alexander Galetovic April 2002 A principal, who wants prices to be as low as 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. |
