Aftermarket welfare and procurement auctions

Aftermarket social welfare is largely determined by a procurement auction design. Auctions select firms for operating aftermarkets, and auctions may also impose restrictions on aftermarket prices the winner can charge. This paper compares aftermarket social welfare generated by first-price and second-price procurement auctions. It reveals that the social welfare ranking depends on the monotonicity properties of the augmented demand elasticity, defined as a product of the demand elasticity and the firm's relative markup. When the augmented elasticity is price independent, first-price and second-price procurement auctions are welfare-equivalent. When it increases (or decreases) with price, first-price (or second-price) auctions are welfare-superior.