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Entry and R & D Costs in Competitive Procurements and Contracting

Tan, Guofu (1989) Entry and R & D Costs in Competitive Procurements and Contracting. Social Science Working Paper, 708. California Institute of Technology , Pasadena, CA. (Unpublished)

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A model of competitive procurements and contracting is presented. The key features of the model include pre-contract R&D, an endogenous number of symmetric firms, and a first-price sealed-bid procurement auction. The unique symmetric perfect free-entry equilibrium is characterized. If the R&D technology is variable scale with constant marginal returns, it is socially optimal for one firm to do all of the R&D and production. However, since the buyer considers only his own cost of procurement, the buyer will prefer to allow free entry, and the number of firms will usually be larger than is socially optimal. If the R&D technology is fixed-scale, the buyer's choices will be socially optimal if the buyer's opportunity cost of an alternative procurement is high. On the other hand, if the opportunity cost is low the buyer will choose a reservation price lower than the socially optimal value and a number of firms no larger than the socially optimal number. Certainly, the type of R&D technology plays an important role in determining optimal R&D and procurement policies for the buyer and for society.

Item Type:Report or Paper (Working Paper)
Additional Information:Financial support from the Alfred P. Sloan Foundation and the Jet Propulsion Laboratory of Caltech is gratefully acknowledged. I would especially like to thank John Ledyard for encouragement and very helpful suggestions. I am also grateful to Richard Boylan, Preston McAfee. Thomas Palfrey, Daniel Spulber, and other participants at the Caltech Theory Workshop for useful comments and discussions. The responsibility for any errors is entirely mine.
Group:Social Science Working Papers
Funding AgencyGrant Number
Alfred P. Sloan FoundationUNSPECIFIED
Series Name:Social Science Working Paper
Issue or Number:708
Classification Code:JEL: 022, 026, 621
Record Number:CaltechAUTHORS:20170901-155513164
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81108
Deposited By: Jacquelyn Bussone
Deposited On:05 Sep 2017 23:20
Last Modified:03 Oct 2019 18:39

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