Efficient Competition with Small Numbers -- with Applications to Privatisation and Mergers

27 Pages Posted: 26 Aug 2000 Last revised: 12 Oct 2010

See all articles by Kala Krishna

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Torben Tranaes

Rockwool Foundation Research Unit; Danish National Institute of Social Research (SFI); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: February 1999

Abstract

This paper studies competition between a small number of suppliers and a single buyer (or an auction with a small number of bidders and a single seller), when total demand (supply) is uncertain. It is well known that when a small number of suppliers compete in supply functions the service is not provided efficiently. We show that production efficiency is obtained if suppliers compete in simple two-part bid functions. However, profits are not eliminated. Moreover, the buyers' (sellers') decision regarding how much to buy is not efficient. We also show that suppliers (bidders in an auction) always have an incentive to merge (form bidding rings) in this setting.

Suggested Citation

Krishna, Kala and Tranaes, Torben, Efficient Competition with Small Numbers -- with Applications to Privatisation and Mergers (February 1999). NBER Working Paper No. w6952, Available at SSRN: https://ssrn.com/abstract=226402

Kala Krishna (Contact Author)

Pennsylvania State University - Department of Economics ( email )

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Torben Tranaes

Rockwool Foundation Research Unit ( email )

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IZA Institute of Labor Economics

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