Preferred Suppliers in Asymmetric Auction Markets


This paper examines preference in procurement with asymmetric suppliers. The preferred supplier has a right-of-first-refusal to obtain the contract at a price equal to the bid of a competing supplier. Despite the inefficiency created by the right-of-first-refusal, preference increases the joint surplus of the buyer and the preferred supplier. The buyer can increase his surplus by holding a pre-auction for the right-of-first-refusal. This is true even when the ex ante stronger supplier wins this pre-auction for preference.

Published as: Preferred Suppliers in Auction Markets in The RAND Journal of Economics , Vol. 40, No. 2, 283--295, January, 2009