Publication Date: April 2002
Revision Date: July 2007
A principal, who wants prices to be as low as possible, contracts with agents who would like to charge the monopoly price. The principal chooses between a Demsetz auction, which awards an exclusive contract to the agent bidding the lowest price (competition for the ﬁeld) and 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, the principal prefers a Demsetz auction. Moreover, a planner who wants to maximize social surplus also prefers a Demsetz auction.
Demsetz auction, Double marginalization, Franchising, Joint vs. separate auctions, Monopoly, Procurement, Dealerships, Royalty contracts
JEL Classification Codes: D44, L12, L92