When do auctions ensure the welfare-maximizing allocation of scarce inputs?

We determine when an unfettered auction will ensure the welfare-maximizing allocation of a scarce input that enhances product quality and may reduce production costs. A supplier values the input for this use value and for its foreclosure value, because once the input is acquired, it is unavailable to rivals. An unfettered auction often ensures the welfare-maximizing allocation of an input increment. However, it can fail to do so when the input would increase relatively rapidly the competitive position of a rival with a moderate competitive disadvantage. Bidder handicapping that ensures auctions generate welfare-maximizing input allocations differ from standard handicapping policies.