Bidding for a process innovation under alternative modes of competition

This paper examines whether a first-price, sealed-bid auction is efficient in allocating a process innovation amongst oligopolists engaged in either Cournot or Bertrand competition. Standard bidding behavior is modified by the incentive to signal private information in order to influence the oligopoly outcome. It is shown that, for Cournot, there exists a unique equilibrium in strictly increasing strategies that is symmetric, and therefore allocatively efficient. For Bertrand, an efficient equilibrium may not exist. However, efficiency is restored as the market becomes perfectly competitive. The results underline the sensitivity of efficient auction design to downstream market structures. (C) 2003 Elsevier Science B.V. All rights reserved.