Contracting with capacity constrained suppliers

Abstract.

This paper characterizes the optimal and efficient mechanisms to allocate simultaneously two substitute tasks to two suppliers. Two main results emerge from this analysis. First, even under some regularity conditions efficiency and optimality do not systematically coincide. Efficiency can always be achieved using some second price auctions which are optimal when both suppliers compete for the same task. When there is competition for different tasks the optimal production is distorted from efficiency over a nondegenerate interval of types so as to extract the full surplus over that interval. Second, full extraction of the surplus may still guarantee incentive compatibility.