In competitive procurement auctions, bids often have the form of unit-price contracts (UPCs). We show that optimal bidding behavior in UPC auctions is typically nonmonotonic and therefore may lead to inefficient allocations. However, UPC auctions may still be desirable for the buyer when compared to efficient mechanisms such as the first-price auction. In a UPC auction, low types are subsidized, and the resulting stronger competition reduces the winning bidder's informational rent, which overcompensates the efficiency loss.
Some of the best-known results in mechanism design depend criticallyon Myerson's (Math Oper Res 6:58-73, 1981) regularity condition. For example,the second-price auction with reserve price is revenue maximizing only if the typedistribution is regular. This paper offers two main findings. First, a new interpretationof regularity is developed-similar to that of a monotone hazard rate-in terms ofbeing the next to fail. Second, using expanded concepts of concavity, a tight sufficientcondition is obtained for a density to define a regular distribution. New examples ofregular distributions are identified. Applications are discussed.
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C O N T E N T S Abstract 4Non-technical summary 5
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