Numerous design and repair services are nonstandard and have to be tailored to the needs of the individual buyers. Prospective sellers have to make preliminary efforts in order to come up with a plan, and buyers often consult a number of sellers before making a purchase. The literature on procurement studies such situations for the case of a large buyer who can commit to a procurement mechanism. The present paper considers the case of a small buyer who cannot commit to a mechanism. It develops a simple sequential procurement model and investigates its equilibria and welfare optima. The main qualitative conclusion concerns the inherent inefficiency of the equilibria. The price competition results in too low consultation fees, which induce overly intense search by buyers, which in turn erodes sellers' effort incentives.
ASJC Scopus subject areas
- Economics and Econometrics