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License auctions when winning bids are financed through debt

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  • Haan, M.A.
  • Toolsema, L.A.

    (Groningen University)

Abstract

We study an auction where two licenses to operate on a new market are sold, and winning bidders finance their bids on the debt market. Higher bids imply higher debts, which affects product market competition. We compare our results to those of a beauty contest and a standard auction. For the case that debt induces firms to compete more aggressively, we find that consumer prices are lower, and expected firm profits are strictly positive although firms are a priori identical. When debt induces firms to compete less aggressively, we find that firms make zero profits, and consumer prices are higher.

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File URL: http://irs.ub.rug.nl/ppn/296644579
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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 06F06.

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Date of creation: 2006
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Handle: RePEc:dgr:rugsom:06f06

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  1. Zheng, Charles Zhoucheng, 2001. "High Bids and Broke Winners," Staff General Research Papers 12665, Iowa State University, Department of Economics.
  2. Heidrun C. Hoppe & Philippe Jehiel & Benny Moldovanu, 2006. "License Auctions and Market Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 371-396, 06.
  3. John McMillan, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-162, Summer.
  4. Wolfstetter, Elmar, 1996. " Auctions: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 10(4), pages 367-420, December.
  5. van Damme, Eric, 2002. "The European UMTS-auctions," European Economic Review, Elsevier, vol. 46(4-5), pages 846-858, May.
  6. R. Preston McAfee & John McMillan, 1996. "Analyzing the Airwaves Auction," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 159-175, Winter.
  7. Tilman Börgers & Christian Dustmann, 2003. "Awarding telecom licences: the recent European experience," Economic Policy, CEPR & CES & MSH, vol. 18(36), pages 215-268, 04.
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Cited by:
  1. Roberto Burguet & Preston McAffee, 2005. "License Prices for Financially Constrained Firms," Working Papers 224, Barcelona Graduate School of Economics.
  2. 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.
  3. 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.

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