Working Paper: CEPR ID: DP924
Authors: Jeremy Bulow; Paul Klemperer
Abstract: Which is the more profitable way to sell a company: a public auction or an optimally structured negotiation with a smaller number of bidders? We show that under standard assumptions the public auction is always preferable, even if it forfeits all the seller's negotiating power, including the ability to withdraw the object from sale, provided only that it attracts at least one extra bidder. An immediate public auction also dominates negotiating while maintaining the right to hold an auction subsequently with more bidders. The results hold for both the standard independent private values model and a common values model. They suggest that the value of negotiating skill is small relative to the value of additional competition.
Keywords: auctions; negotiations; mergers and acquisitions; asset sales
JEL Codes: D44; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| number of bidders (D44) | expected revenue from a sale mechanism (D47) |
| negotiation strategies (C78) | seller's revenue compared to auctions (D44) |
| publicizing a sale (M31) | bidder participation (D44) |
| publicizing a sale (M31) | negotiating power (C78) |
| direct auction with n+1 bidders (D44) | expected revenue (H27) |
| negotiating while maintaining auction option (D44) | effectiveness of negotiation (F51) |
| additional competition (L19) | negotiating skill (C78) |