Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Abstract: In many procurement auctions, entrants determine whether to participate in auctions accounting for their roles of intermediaries who search for the best (or the cheapest) input suppliers. We build on a procurement auction model with entry, combining with intermediary search for suppliers. The novel feature is that costs of bidders are endogenously determined by suppliers who strategically charge input prices. We show the existence of an equilibrium with price dispersion for inputs, generating cost heterogeneity among bidders. Interestingly, the procurement cost may rise as the number of potential bidders increases.

Keywords: Information Frictions, Search, Procurement, Auction, Vertical Relations, Entry Deterrence, Price Dispersion

JEL-codes: D43; D44; D83; L13 August 2015

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