This paper investigates firms' incentives to invest in cost reduction in the first price sealed bid auction, a format … investment is observable. We find that firms will tend to underinvest in cost reduction because they anticipate fiercer head …-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment …

We investigate firms' incentives for cost reduction in the first price sealed bid auction, a format largely used for … the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market … participants. Moreover, both auction formats tend to favor investment by the current market leader and are therefore likely to …