sunk cost and bidding Retum to the bidding story in Table 16.3, but assume a =1 ,000 and fi ='Y =1 0.

We will aIso now interpret the ax term as a type of design eost that must be incurred hefore the bidding. So at the time of bidding the ax term is a sunk eost; the firms ineurred this eost hefore submitting their bids. Verify that the case 1 bidding strategies in Table 16.3 are equilibrium strategies here as weIl. What is the expi anation?

Of eourse, the firms would not have done this initial design work, and ineurred the ax eost, had they looked ahead to the bidding exereise. What might the buying firm do in this instanee in order to ensure a supply of bidders?

AppendixLO1