Competition In or For the Field: Which is Better

COMPETITION IN OR FOR THE FIELD:

WHICH IS BETTER?

BY EDUARDO ENGEL, RONALD FISCHER AND ALEXANDER GALETOVIC¹

March, 2002

Abstract

In many circumstances, a principal, who wants prices to be as low as possible, must contract with
agents who would like to charge the monopoly price. This paper compares a Demsetz auction, which awards
an exclusive contract to the agent bidding the lowest price (competition for the field) with having two agents
provide the good under (imperfectly) competitive conditions (competition in the field). We obtain a simple
sufficient condition showing unambiguously which option is best. The condition depends only on the shapes
of the surplus function of the principal and the profit function of agents, and is independent of the particular
duopoly game played ex post. We apply this condition to three canonical examples—procurement, royalty
contracts and dealerships—and find that whenever marginal revenue for the final good is decreasing in the
quantity sold, a Demsetz auction is best. Moreover, a planner who wants to maximize social surplus also
prefers a Demsetz auction.

Key words: Demsetz auction, double marginalization, franchising, joint vs. separate auctions, monopoly,
procurement, dealerships, royalty contracts

JEL classification: D44, L12, L92

¹Engel: Department of Economics, Yale University, 28 Hillhouse Ave., New Haven, CT 06511. Fischer and Galetovic:
Center for Applied Economics (CEA), Department of Industrial Engineering, University of Chile, Av. Repùblica 701, Santiago,
Chile. E-mails: [email protected], [email protected], [email protected]. Financial
support from FONDE-CYT (Grant 1980658) is gratefully acknowledged.

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