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License auctions when winning bids are financed through debt

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Author Info
Haan, Marco A.
Toolsema, Linda A. (Groningen University)

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Abstract

We study an auction where two licenses to operate on a new market are sold. Winners finance their bids on a competitive debt market. Due to limited liability, the amount of debt affects their behavior on the product market. In equilibrium, consumer prices are lower than with a beauty contest, where firms obtain their licenses for free. Winning bids are lower than in a model where firms have internal funds. Higher bids cannot be financed due to credit rationing. Expected net firm profits are strictly positive, although firms are a priori identical and have the same information.

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File URL: http://irs.ub.rug.nl/ppn/253177618
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Paper provided by University of Groningen, CCSO Centre for Economic Research in its series CCSO Working Papers with number 200310.

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Date of creation: 2003
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Handle: RePEc:dgr:rugccs:200310

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  1. Emiel Maasland & Sander Onderstal, 2006. "Going, Going, Gone! A Swift Tour of Auction Theory and its Applications," De Economist, Springer, vol. 154(2), pages 197-249, June. [Downloadable!] (restricted)
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  2. Roberto Burguet & R. McAfee, 2009. "License prices for financially constrained firms," Journal of Regulatory Economics, Springer, vol. 36(2), pages 178-198, October. [Downloadable!] (restricted)
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