Preferred Suppliers in Asymmetric Auction Markets

• Authors: Roberto Burguet.
• BSE Working Paper: 110082 | September 15
• Keywords: procurement auctions , vertical integration , bargaining solutions
• JEL codes: D44, D82, C79
• procurement auctions
• vertical integration
• bargaining solutions

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.