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Do Auctions select Efficient Firms?

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Author Info

  • Maarten C.W. Janssen

    ()
    (Erasmus Universiteit Rotterdam)

  • Vladimir A. Karamychev

    ()
    (Erasmus Universiteit Rotterdam)

Abstract

This discussion paper led to a publication in 'The Economic Journal' , 120(549) 1319-44. This paper considers a government auctioning off multiple licenses to firms who compete in a market after the auction. Firms have different costs, and cost efficiency is private information at the auction stage and the market competition stage. If only one license is auctioned, standard results say that the most efficient firm wins the auction (license) as it will get the highest profit in the aftermarket, i.e., it has the highest valuation for the license. This paper argues that this result does not generalize to the case of multiple licenses and aftermarket competition. In particular, we determine conditions under which auctions may select inefficient firms and therefore lead to an inefficient allocation of resources. Strategic interactions in the aftermarket, in particular firms’ preferences to compete with the least cost-efficient firms rather than with the most efficient firms, are responsible for our result.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-001/1.

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Date of creation: 04 Jan 2007
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Handle: RePEc:dgr:uvatin:20070001

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Web page: http://www.tinbergen.nl

Related research

Keywords: Auctions; cost-efficiency; aftermarkets;

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References

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  1. Philippe Jehiel & Benny Moldovanu, 2005. "Allocative and Informational Externalities in Auctions and Related Mechanisms," Levine's Bibliography 784828000000000490, UCLA 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. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1996. "How (Not) to Sell Nuclear Weapons," American Economic Review, American Economic Association, vol. 86(4), pages 814-29, September.
  4. Jehiel, Philippe & Benny Moldovanu, 1994. "Strategic Non-Participation," Discussion Paper Serie B 287, University of Bonn, Germany.
  5. Janssen, Maarten C.W. & Karamychev, Vladimir A., 2007. "Selection effects in auctions for monopoly rights," Journal of Economic Theory, Elsevier, vol. 134(1), pages 576-582, May.
  6. Jacob K. Goeree, 2000. "Bidding for the Future," Virginia Economics Online Papers 346, University of Virginia, Department of Economics.
  7. Philippe Jehiel & Benny Moldovanu, 2003. "An economic perspective on auctions," Economic Policy, CEPR & CES & MSH, vol. 18(36), pages 269-308, 04.
  8. Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, vol. 94(5), pages 1452-1475, December.
  9. Janssen, Maarten C.W., 2006. "Auctions as coordination devices," European Economic Review, Elsevier, vol. 50(3), pages 517-532, April.
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Citations

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Cited by:
  1. Maarten Janssen & Vladimir Karamychev, 2013. "Gaming in Combinatorial Clock Auctions," Tinbergen Institute Discussion Papers 13-027/VII, Tinbergen Institute, revised 16 Dec 2013.
  2. Maarten C.W. Janssen & Vladimir A. Karamychev & Emiel Maasland, 2008. "Simultaneous Pooled Auctions with Multiple Bids and Preference Lists," Tinbergen Institute Discussion Papers 08-034/1, Tinbergen Institute.
  3. Maarten Janssen & Vladimir Karamychev, 2013. "Gaming in Combinatorial Clock Auctions," Tinbergen Institute Discussion Papers 13-027/VII, Tinbergen Institute, revised 16 Dec 2013.

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