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Limited Liability and High Bids in English Auctions

Author

Listed:
  • Wang Tao
  • Wang Ruqu

    (Department of Economics, Queen’s University, Kingston, Ontario K7L 3N6, Canada)

Abstract

In this paper, we investigate how limited liability affects firms’ bidding behavior in license auctions. We focus on a model where firms first seek financing from banks, then bid for the licenses, and the winning firms set prices in a product market with uncertain demand. In a model of one license, the winning firm becomes a monopoly. A higher bid induces a higher product price. In a model of two licenses, a higher bid provides a positive externality to all other firms. In both models, bids are extremely high in the English auction, and the English auction always generates more revenue than the first-price/discriminatory auction.

Suggested Citation

  • Wang Tao & Wang Ruqu, 2018. "Limited Liability and High Bids in English Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(2), pages 1-12, July.
    • Handle: RePEc:bpj:bejtec:v:18:y:2018:i:2:p:12:n:10
    DOI: 10.1515/bejte-2016-0152
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    References listed on IDEAS

    as
    1. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-653, June.
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    3. Marco A. Haan & Linda A. Toolsema, 2011. "License Auctions When Winning Bids Are Financed Through Debt," Journal of Industrial Economics, Wiley Blackwell, vol. 59(2), pages 254-281, June.
    4. Haan, Marco A. & Toolsema, Linda A., 2008. "The strategic use of debt reconsidered," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 616-624, March.
    5. Peter Cramton & Evan Kwerel & Gregory Rosston & Andrzej Skrzypacz, 2011. "Using Spectrum Auctions to Enhance Competition in Wireless Services," Journal of Law and Economics, University of Chicago Press, vol. 54(S4), pages 167-188.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    license bidding; limited liability; auctions; externality; revenue comparison;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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