ENTRY AND RESEARCH-AND-DEVELOPMENT IN PROCUREMENT CONTRACTING

A model of competitive procurement and contracting is presented in this paper. The key features of the model include precontract R & D, an endogenous number of homogeneous firms, and sealed-bid auction rules. Both diminishing and constant returns to scale (DRS and CRS) in R & D expenditure technologies are considered. I find that the sealed-bid first-price auction (FPA) is equivalent to the second-price auction (SPA) under DRS technology. The Revenue Equivalence Theorems breaks down under CRS because multiple equilibria arise in the R & D stage when SPA is used. Howerer, SPA yields a unique perfect equilibrium given sufficient heterogeneity among potential firms. The free-entry perfect equilibrium is also characterized. The buyer prefers free entry through an appropriate selection of the reservation price. © 1992.