Renegotiation with Ex-Post Competition in Procurement

Abstract

Contractual incompleteness in procurement causes renegotiation and hold-up problems over suppliers' quality and cost modifying investments. In contrast to complete contracting, there has been little progress in understanding how competition amongst suppliers for consumers affects investment decisions under incompleteness. We explore this interaction by introducing imperfect competition into the incomplete contracts paradigm. In order to analyze bargaining between the procurer and the firms in the oligopoly we developed a bargaining game which parallels the Shapley Value but takes into account how one firm's investments affect other firms' outside options through changes in the competitive equilibrium. Compared to local monopoly, competition increases investment incentives, sometimes excessively. Ex ante contracts play an important role in determining investment levels and under certain circumstances the first best is achievable. Our model provides important new insights into competition in the public procurement of services like mandatory insurance, education and health. Our framework is also applicable to profit maximizing intermediary platforms like Amazon and Steam.

About the presenter’s visit

Dr Ruitian Lang will be visiting the School of Economics on Friday 27^th September 2019.  While here she will be using room 520A Colin Clark Building. If you would like to meet with her or have lunch or dinner with her please contact Dr Metin Uyanik who will be her host while at The University of Queensland. Dr Uyanik can be contacted on m.uyanik@uq.edu.au.