Bundled Procurement for (Free) Technology Acquisition and Future Competition

Abstract:     
We study a procurement mechanism that bundles the project procurement with the technology acquisition for a buyer who aims to compete with current suppliers in the future. We analyze the optimal technology offers of the asymmetric suppliers and predict the outcome of such a bundled procurement mechanism. Under the two-supplier case, we find that each supplier has a dominant technology offer strategy that is independent from the offer strategy of the other supplier and solely depends on the technology gap between the suppliers and the ratio between the current project size and the future market size. When this ratio is low, the suppliers only offer obsolete technologies even if they are perfect substitutes. While suppliers offer better technologies as this ratio increases, the suppliers' technology offers are not continuous with respect to the ratio. Once the ratio reaches some threshold, the supplier' optimal response jumps and the best technology will be offered. We find that a ratio of 5% to 10% is sufficient for the suppliers to offer the best technologies under reasonable market conditions. When the suppliers do offer their best technologies, the additional premium for technology acquisition is negligible comparing to the profit from the future market.

Number of Pages in PDF File: 20

Keywords: procurement mechanism, game theory, technology acquisition, multinomial logit model, China policy

JEL Classification: H57, O34

working papers series