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Auctions vs. Negotiations

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Author Info
Bulow, Jeremy I
Klemperer, Paul

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 924.

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Date of creation: Mar 1994
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Handle: RePEc:cpr:ceprdp:924

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Related research
Keywords: Asset Sales; Auctions; Mergers and Acquisitions; Negotiations;

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring. [Downloadable!] (restricted)
  2. Engelbrecht-Wiggans Richard, 1993. "Optimal Auctions Revisited," Games and Economic Behavior, Elsevier, vol. 5(2), pages 227-239, April. [Downloadable!] (restricted)
  3. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  4. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March. [Downloadable!] (restricted)
  5. Avery, Christopher, 1998. "Strategic Jump Bidding in English Auctions," Review of Economic Studies, Blackwell Publishing, vol. 65(2), pages 185-210, April. [Downloadable!] (restricted)
  6. Holmstrom, Bengt & Nalebuff, Barry, 1992. "To the Raider Goes the Surplus? A Reexamination of the Free-Rider Problem," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(1), pages 37-62, Spring.
  7. Andrei Shleifer & Robert W. Vishny, 1986. "Greenmail, White Knights, and Shareholders' Interest," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 293-309, Autumn. [Downloadable!] (restricted)
  8. McAfee, R Preston & Vincent, Daniel, 1992. "Updating the Reserve Price in Common-Value Auctions," American Economic Review, American Economic Association, vol. 82(2), pages 512-18, May. [Downloadable!] (restricted)
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  9. Bulow, Jeremy & Klemperer, Paul, 1994. "Rational Frenzies and Crashes," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 1-23, February. [Downloadable!] (restricted)
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  10. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June. [Downloadable!] (restricted)
  11. Hirshleifer, David & Titman, Sheridan, 1990. "Share Tendering Strategies and the Success of Hostile Takeover Bids," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 295-324, April. [Downloadable!] (restricted)
  12. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347. [Downloadable!] (restricted)
  13. Shleifer, Andrei & Vishny, Robert W, 1988. "Value Maximization and the Acquisition Process," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 7-20, Winter. [Downloadable!] (restricted)
  14. I. Png, 1984. "The Information Conveyed by a Takeover Bid," University of California at Los Angeles, Anderson Graduate School of Management 1206, Anderson Graduate School of Management, UCLA. [Downloadable!]
  15. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Binmore, Kenneth & Klemperer, Paul, 2002. "The Biggest Auction Ever: The Sale of the British 3G Telecom Licences," CEPR Discussion Papers 3214, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Alexander Galetovic & JUAN RICARDO INOSTROZA, 2004. "Tarificación de la Transmisión Eléctrica: por qué licitar es (mucho) mejor que regular," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 19(1), pages 77-117, June. [Downloadable!]
  3. Paul Klemperer, 2000. "Why Every Economist Should Learn Some Auction Theory," Microeconomics 0004009, EconWPA. [Downloadable!]
    Other versions:
  4. René Kirkegaard & Per Baltzer Overgaard, 2002. "Buy-Out Prices in Online Auctions: Multi-Unit Demand," CIE Discussion Papers 2003-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics, revised Feb 2003. [Downloadable!]
    Other versions:
  5. Alexander Galetovic & Juan Ricardo Inostroza, 2004. "Transmisión eléctrica y la “ley corta”: por qué licitar es (mucho) mejor que regular (Electricity transmission and the short law: why offering for tender is [much] better than regulation)," Documentos de Trabajo 177, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  6. Roberto Burguet, 2000. "Auction theory: a guided tour," Investigaciones Economicas, Fundación SEPI, vol. 24(1), pages 3-50, January. [Downloadable!]
    Other versions:
  7. Michael Peters, 1997. "Surplus Extraction and Competition," Working Papers peters-97-02, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  8. Ed Hopkins & Tatiana Kornienko, 2004. "Ratio Orderings and Comparative Statics," ESE Discussion Papers 91, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  9. D. K"Ubler, . "Auctioning Off Labor Contracts: Legal Restrictions Reconsidered," Sonderforschungsbereich 373 1996-22, Humboldt Universitaet Berlin.
  10. Michael Peters, 1996. "Competition Among Mechanism Designers in a Common Value Environment," Working Papers peters-96-01, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  11. Boeheim, Rene & Zulehner, Christine, 1996. "Auctions - A Survey," Economics Series 39, Institute for Advanced Studies. [Downloadable!]
  12. Vijay Krishna & John Morgan, 1994. "An Analysis of the War of Attrition and the All-Pay Auction," Game Theory and Information 9409002, EconWPA. [Downloadable!]
    Other versions:
  13. Paul Klemperer, 2002. "Some Observations on the British and German 3G Telecom Auctions," Economics Papers 2002-W20, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  14. Jose E. Quintero Jaramillo, 2004. "Liquidity Constraints And Credit Subsidies In Auctions," Business Economics Working Papers wb040604, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  15. Ronald M. Harstad & Vlad Mares, 2005. "Ex-Post Full Surplus Extraction, Straightforwardly," Working Papers 0515, Department of Economics, University of Missouri. [Downloadable!]
    Other versions:
  16. A. Masters & A. Muthoo, 2003. "Ex Ante Price Commitment with Renegotiation in a Dynamic Market," Economics Discussion Papers 555, University of Essex, Department of Economics. [Downloadable!]
  17. Maasland, E. & Onderstal, S., 2002. "Optimal auctions with financial externalities," Discussion Paper 21, Tilburg University, Center for Economic Research. [Downloadable!]
  18. Adrian Masters & Abhinay Muthoo, 2000. "Ex-Ante Price Commitment with Renegotiation in a Dynamic Market Equilibrium," ILR working papers 056, Institute for Labour Research. [Downloadable!]
    Other versions:
  19. René Kirkegaard & Per Baltzer Overgaard, 2005. "Pre-Auction Offers in Asymmetric First-Price and Second-Price Auctions," CIE Discussion Papers 2005-04, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
    Other versions:
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