Journal Article

Entry and Competition Effects in First-Price Auctions: Theory and Evidence from Procurement Auctions

Tong Li and Xiaoyong Zheng

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 76, issue 4, pages 1397-1429
Published in print October 2009 | ISSN: 0034-6527
Published online October 2009 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00558.x
Entry and Competition Effects in First-Price Auctions: Theory and Evidence from Procurement Auctions

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Motivated by several interesting features of the highway mowing auction data from the Texas Department of Transportation (TDoT), we study three competing procurement auction models with endogenous entry. Our entry and bidding models provide several interesting implications. For the first time, we show that even within an independent private value paradigm, as the number of potential bidders increases, bidders' equilibrium bidding behaviour can become less aggressive, and the expected procurement cost may rise because the “entry effect” is always positive and may dominate the negative “competition effect”. We then develop structural models of entry and bidding corresponding to the three models under consideration, controlling for unobserved auction heterogeneity, and use the recently developed semi-parametric Bayesian estimation method to analyse the data. We select the model that best fits the data, and use the corresponding structural estimates to quantify the “entry effect” and the “competition effect” with regard to the individual bids and the procurement cost.

Keywords: D44; H76

Journal Article.  14832 words.  Illustrated.

Subjects: Public Economics ; Market Structure and Pricing

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