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License auctions when winning bids are financed through debt

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Author Info
Haan, M.A.
Toolsema, L.A. (Groningen University)

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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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Publisher 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. 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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