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Auction with aftermarket for budget constrained bidders

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  • Masili, Gustavo

Abstract

The paper compares different auction formats for sale of a single patented innovation for budget constrained bidders. This unit decreases the marginal cost of production in the aftermarket for its owner by an amount which depends on the money invested on the development of this technology. As the bidders have a fixed budget that must be used to pay the final auction price and also to develop the new technology, the winner has incentives to pay a low amount for his unit to increase the amount available to invest in cost reduction. Conversely the loser has incentives to induce induce a higher price to be paid by the winner in order to increase aftermarket profits. This conflict of interest generates the willingness to pay (WTP) for the patent through an endogenous process, which may end up by stablishing a higher WTP for the lowest financed firm. Given this background, the case in which the players have different initial budgets may generate multiple equilibria for all studied auction mechanisms. These equilibria produce di¤erent consumer surplus and, thus, a central government with an unti-trust behavior is able to choose the auction that generates the re�ned equilibrium leading to the highest consumer surplus.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2134.

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Date of creation: 24 Jul 2006
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Handle: RePEc:pra:mprapa:2134

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Keywords: Market design; auction; aftermarket; budget constraints; investment;

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  1. Carolyn Pitchik, 2006. "Budget-Constrained Sequential Auctions with Incomplete Information," Working Papers, University of Toronto, Department of Economics tecipa-230, University of Toronto, Department of Economics.
  2. Bergstrom, Theodore C. & Varian, Hal R., 1985. "Two remarks on Cournot equilibria," Economics Letters, Elsevier, Elsevier, vol. 19(1), pages 5-8.
  3. Marco Pagnozzi, 2007. "Bidding to lose? Auctions with resale," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 38(4), pages 1090-1112, December.
  4. Pitchik, Carolyn & Schotter, Andrew, 1986. "Perfect Equilibria in Budget Constrained Sequential Auctions: An Experimental Study," Working Papers, C.V. Starr Center for Applied Economics, New York University 86-22, C.V. Starr Center for Applied Economics, New York University.
  5. Roberto Burguet & R. Preston McAfee, 2008. "License Prices for Financially Constrained Firms," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 745.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. Roberto Burguet, 2000. "Auction theory: a guided tour," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 24(1), pages 3-50, January.
  7. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
  8. Schwartz, Marius, 1989. "Investments in Oligopoly: Welfare Effects and Tests for Predation," Oxford Economic Papers, Oxford University Press, vol. 41(4), pages 698-719, October.
  9. Goeree, Jacob K., 2003. "Bidding for the future: signaling in auctions with an aftermarket," Journal of Economic Theory, Elsevier, Elsevier, vol. 108(2), pages 345-364, February.
  10. Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(1), pages 1-21, January.
  11. Bandulet Martin & Morasch Karl, 2003. "Incentives to Invest in Transport Cost Reduction - Conceptual Issues and an Application to Electronic Commerce," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 3(1), pages 1-22, December.
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