Bundled Procurement for (Free) Technology Acquisition and Future Gain

We study the effectiveness of a procurement mechanism of a buyer that bundles the product procurement with the technology acquisition. We analyze the bidding behavior of rational suppliers and predict the outcome of such a bundling strategy. Using the two-supplier case, we find that each supplier has a dominant bidding strategy for the technology provision that is independent from the bidding strategy of the other supplier and solely depends on the technology difference of the suppliers and the ratio between the current project size and the future market size. When the buyer procures the technology separately or this ratio is low, the buyer would not be able to solicit the best technologies even if the suppliers’ technologies are perfect substitutes. As this ratio increases, suppliers provide better technologies. Furthermore, the suppliers’ behaviors are not continuous with respect to the ratio. Once the ratio crosses some threshold, the suppliers’ responses jump and the best technologies will be offered. We find that a ratio of 10% is sufficient for the suppliers to provide best technologies for most reasonable market conditions. When the suppliers provide their best technologies, the buyer would pay a slightly higher price for the current project under the bundling strategy; nevertheless, given the up-to-date technologies, the buyer will be adequately compensated for being able to compete as a supplier in the future market.