Participation and discrimination in procurement auctions

Abstract

We propose a new model of auctions with endogenous participation where the number of bidders from each group of potential entrants follows a Poisson distribution. The model allows very general forms of asymmetries by imposing no structure on the valuation distribution of each group of entrants but also by having possibly some incumbents that enter the auction for sure and whose rents are internalized by the seller. We first establish a general non-discrimination result: Without incumbents, the seller should propose a format that allocates the good efficiently among the set of entrants and the corresponding entry rates are necessarily efficient for an ex-ante perspective. With incumbents and under an information structure à la Myerson (1981), we characterize the seller's optimal design which involves discrimination against the incumbents and can be implemented with a second-price auction with a non-linear bid preference program. We then adopt a positive design perspective by analyzing standard instruments, in particular the reserve price policy which do not allow direct discrimination against incumbents. On the whole, we provide simple answers to hugely debated questions among which bid preferences (or affirmative action) programs, the reserve price policy against a bidding-ring and favoritism toward domestic firms. Our results are also useful regarding the econometric literature that deals with structural models with endogenous entry. Joint with Philippe Jehiel