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In anticipation of a procurement auction, speculators have the incentive to consolidate the market by acquiring items from different sellers. By doing so, speculators gain market power and can reduce competition in the procurement auction. Consequently, a speculator's expected gain from the procurement auction may be high and more than enough to cover the acquisition costs. To study the profitability and welfare implications of such a speculation scheme, I incorporate a speculator and a pre-auction acquisition stage in an independent private value procurement auction model.The profitability of the speculation scheme hinges on the auction format. In second-price auctions, the speculator can always obtain a positive expected payoff. In contrast, speculation can be unprofitable in firstprice auctions. Furthermore, the expected profit from speculation is always higher in second-price auctions than in first-price auctions. The driving force behind the comparison is the difference in strategic responses of sellers who end up participating in the auction: In first-price auctions, sellers respond to the speculator's participation by bidding more aggressively; while in second-price auctions

Author

Deng, Shanglyu (author)

Publisher

ACM

Published

2022

Language

EN