Gopal Das Varma

"Bidding for a process innovation under alternative modes of competition," International Journal of Industrial Organization Volume 21, Issue 1, January 2003, pp. 15-37.

JEL codes: L13, D44, D61
Keywords: oligopoly, auctions, efficiency

Abstract: This paper examines whether a first-price sealed-bid auction is efficient in allocating a process innovation amongst oligopolists engaged in two alternative modes of competition: Cournot and Bertrand. Standard bidding behavior is modified by the incentive to signal private information in order to influence the oligopoly outcome. It is shown that for Cournot, there exists a unique equilibrium in strictly increasing strategies that is symmetric, and therefore successful in allocating the innovation to the firm that values it the most. For Bertrand, there may not exist such an allocatively efficient equilibrium. However, efficiency is restored as the market becomes perfectly competitive. The results underline the sensitivity of efficient auction design to downstream market structures.