Working Paper: NBER ID: w4608
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 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; Corporate Finance
JEL Codes: D44; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased competition (L13) | higher expected revenue for the seller (D49) |
| number of bidders (D44) | expected revenue for the seller (D44) |
| public auction attracts additional bidders (D44) | increases expected surplus per bidder (D44) |
| negotiating while maintaining the right to hold an auction subsequently (D44) | diminishes seller's negotiating power (D41) |