James J. Anton

Split Awards, Procurement, and Innovation

In many procurement settings, it is possible for a buyer to split a production award between suppliers. In this article, we develop a model of split-award procurement auctions in which the split choice is endogenous. We characterize the set of equilibrium bids and allocations for optimizing agents in an environment in which suppliers are fully informed about each others costs. Split-award equilibria simultaneously exhibit strong collusive features and cost-efficiency properties. Despite the former property of the equilibria, upstream investment considerations may lead a buyer to prefer a split-award auction format to a winner-take-all auction format.

Coordination in Split Award Auctions

We analyze split award procurement auctions in which a buyer divides full production between two suppliers or awards all production to a single supplier, and suppliers have private cost information. An intriguing feature of split awards is that the equilibrium bids are implicitly coordinated. Because a split award price is the sum of offered split prices, each supplier can unilaterally veto a split award by bidding very high for the split. The need to coordinate is reflected in a split price that does not vary with private information. We also explore conditions under which split award auctions may be preferred to winner-take-all auctions.

Second Sourcing and the Experience Curve: Price Competition in Defense Procurement

We examine a dynamic model of price competition in defense procurement that incorporates the experience curve, asymmetric cost information, and the availability of a higher cost alternative system. We model acquisition as a two-stage process in which initial production is governed by a contract between the government and the developer. Competition is then introduced by an auction in which a second source bids against the developer for remaining production. We characterize the class of production contracts that are cost minimizing for the government and that induce the developer to reveal private cost information. When high costs are revealed, these contracts result in a credible cutoff of new system production in favor of the still higher cost alternative system.

Entry auctions and strategic behavior under cross-market price constraints

Abstract We examine how universal service provisions and price restrictions across markets impact strategic entry and pricing. We develop a simple multi-market model with an oligopolistic (profitable) urban market and entry auctions for (unprofitable) rural service. Cross-market price restrictions induce a firm operating in both markets to become a ‘softer’ competitor, thus placing the firm at a strategic disadvantage. When we account for entry incentives and strategic bidding, the downstream strategic disadvantage becomes advantageous, leading to higher prices and profits. Price restrictions may also put outside firms, even relatively inefficient ones, at a strategic advantage.

Measuring the Effectiveness of Competition in Defense Procurement: A Survey of the Empirical Literature

This article surveys the empirical literature that has attempted to measure the effects of competition in defense procurement. Its focus is on the conceptual underpinnings of the empirical models rather than on the technical aspects of the estimation procedures. While the empirical studies provide some valuable insight, the studies are flawed because they assume an implicit model of the procurement environment that is inconsistent with reasonable economic behavior on the part of defense contractors and seems to be contradicted by the evidence. In general, the predictive power of the empirical models is also limited by a program-by-program estimation approach in which only a handful of data points are available to estimate two or more parameters. These empirical models could be improved by the use of structural models that assume reasonable economic behavior and provide a theoretical basis for cross-program analyses.

Dynamic Price Competition with Capacity Constraints and a Strategic Buyer

We analyze a simple dynamic durable good model. Two incumbent sellers and potential entrants choose their capacities at the start of the game. We solve for equilibrium capacity choices and the (necessarily mixed) pricing strategies. In equilibrium, the buyer splits the order with positive probability to preserve competition, making it possible that a high and low price seller both have sales. Sellers command a rent above the value of unmet demand by the other seller. A buyer benefits from either a commitment not to make future purchases or by hiring an agent to always buy from the lowest priced seller.

Split-Award Procurement Auctions with Uncertain Scale Economies: Theory and Data

In a number of observed procurements, the buyer has employed an auction format that allows for a split-award outcome. We focus on settings where the range of uncertainty regarding scale economies is large and, depending on cost realizations, the efficient allocations include split-award outcomes as well as sole-source outcomes (one active supplier). We examine the price performance and efficiency properties of split-award auctions under asymmetric information. In equilibrium, both award outcomes can occur--the split-award outcome arises only when it minimizes total costs; sole-source outcomes, however, occur too often from an efficiency viewpoint. Equilibrium bids involve pooling at a common price for the split award, and separation for sole-source awards. We provide conditions under which the buyer and suppliers all benefit from a split-award format relative to a winner-take-all unit auction format. Model predictions are assessed with data on submitted ‘step-ladder’ bid prices for a US defense split-award procurement.

Storability, Market Structure and Demand-Shift Incentives

We consider a two-period model in which buyers can store a good by purchasing in advance of consumption so as to realize potential gains from intertemporal arbitrage. We find that storability introduces a kink in the aggregate period-1 demand. When supply is oligopolistic (quantity setting) and consumers are sufficiently patient (storage cost is relatively low), each firm has a strong current incentive to capture future market share from a rival. As a result, in equilibrium, the price path is increasing and there is rational in-advance purchase by buyers. In contrast, the monopoly and perfectly competitive markets exhibit no such price dynamics. Intermediate storage costs result in multiple equilibria, with at least one that involves advance purchase and one that does not.

External markets and regulation

Abstract Regulated firms often sell to ‘external’ markets in addition to their regulated or ‘internal’ markets. The welfare of consumers in these ‘external’ markets is typically outside of the regulators domain of concern. As a result, ‘external’ markets provide the regulator with additional policy options for the strategic influence of firm behavior in the presence of asymmetric information. Without an ‘external’ market, asymmetric information introduces an incentive cost and, consequently, the optimal policy is forced to distort ‘internal’ production below the first-best level. We show that profit opportunities presented by an ‘external’ market can be used to absorb some (all, when the firm is an ‘external’ price-taker) of the incentive cost, and thus insulate the ‘internal’ market from quantity distortions.

ATTRACTING SKEPTICAL BUYERS: NEGOTIATING FOR INTELLECTUAL PROPERTY RIGHTS*

Expropriable disclosures of knowledge to prospective buyers may be necessary to facilitate the sale of intellectual property (IP). In principle, confidentiality agreements can protect disclosures by granting the seller rights to sue for unauthorized use. In practice, sellers often waive confidentiality rights. We provide an incomplete information explanation for the waiver of confidentiality rights that are valuable in complete information settings. Waiving sacrifices the protective value of confidentiality to gain greater buyer participation. Buyer skepticism, which reduces participation, arises endogenously from three elements: asymmetric information regarding seller IP, rent dissipation from competition for IP, and ex post costs from expropriation lawsuits.