Working Paper: CEPR ID: DP7411
Authors: Jeremy I. Bulow; Paul Klemperer
Abstract: We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether or not to enter the bidding. The sequential process is always more efficient. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry - precisely because of its inefficiency - it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc.
Keywords: auctions; entry; jump bidding; procurement; sequential sales
JEL Codes: D44; G34; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Auction format (D44) | Higher expected revenue for sellers (D49) |
| Sequential mechanisms (C69) | Lower expected revenue for sellers (D49) |
| Competitive environment (L13) | Higher expected revenue for sellers (D49) |
| Inefficiencies of auctions (D44) | Higher expected revenue for sellers (D49) |
| Finite number of potential bidders (D44) | Favor auctions (D44) |
| Distribution of winning values (C46) | Higher expected revenue for sellers (D49) |
| Auction mechanism (D44) | Higher expected revenue for sellers (D49) |