Speculation in Procurement Auctions

TL;DR

This paper analyzes how speculation affects procurement auctions, showing it always yields profit in second-price auctions but can be unprofitable in first-price auctions, with implications for efficiency and seller benefits.

Contribution

It provides a comparative analysis of speculation profitability in first-price versus second-price procurement auctions and examines its impact on market efficiency and seller gains.

Findings

Speculation always yields positive expected profit in second-price auctions.

Speculation can be unprofitable in first-price auctions.

Speculation harms auction efficiency and private value, benefiting sellers at the expense of the auctioneer.

Abstract

A speculator can take advantage of a procurement auction by acquiring items for sale before the auction. The accumulated market power can then be exercised in the auction and may lead to a large enough gain to cover the acquisition costs. I show that speculation always generates a positive expected profit in second-price auctions but could be unprofitable in first-price auctions. In the case where speculation is profitable in first-price auctions, it is more profitable in second-price auctions. This comparison in profitability is driven by different competition patterns in the two auction mechanisms. In terms of welfare, speculation causes private value destruction and harms efficiency. Sellers benefit from the acquisition offer made by the speculator. Therefore, speculation comes at the expense of the auctioneer.