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Bidding Markets with Financial Constraints

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  • Beker, Pablo

    (Department of Economics, University of Warwick)

  • Hernando-Veciana, Angel

    (Universidad Carlos III de Madrid)

Abstract

We develop a model of bidding markets with financial constraints a la Che and Gale (1998b) in which two firms optimally choose their budgets. First, we provide an alternative explanation for the dispersion of markups and “money left on the table” across procurement auctions. Interestingly, this explanation does not hinge on significant private information but on di?erences, both endogenous and exogenous, in the availability of financial resources. Second, we explain why the empirical analysis of the size of markups may be biased downwards or upwards with a bias positively correlated with the availability of financial resources when the researcher assumes that the data are generated by the standard auction model. Third, we show that large concentration and persistent asymmetries in market shares together with occasional leadership reversals can arise as a consequence of the firms internal financial decisions even in the absence of exogenous shocks. JEL classification: bidding markets ; ?nancial constraints ; markups ; money left on the table ; market shares ; industry dynamics JEL codes: L13 ; D43 ; D44

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1017.

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Date of creation: 2013
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Handle: RePEc:wrk:warwec:1017

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  1. Mireia Jofre-Bonet & Martin Pesendorfer, 2001. "Estimation of a Dynamic Auction Game," NBER Working Papers 8626, National Bureau of Economic Research, Inc.
  2. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
  3. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-65, Autumn.
  4. Pitchik, Carolyn & Schotter, Andrew, 1986. "Perfect Equilibria in Budget Constrained Sequential Auctions: An Experimental Study," Working Papers 86-22, C.V. Starr Center for Applied Economics, New York University.
  5. Baye, M.R. & Kovenock, D. & De Vries, C., 1992. "The All-Pay Auction with Complete Information," Papers 8-92-1, Pennsylvania State - Department of Economics.
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  8. Todd Kaplan, 2001. "All-Pay Auctions with Variable Rewards," Discussion Papers 0109, Exeter University, Department of Economics.
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  10. Zheng, Charles Zhoucheng, 2001. "High Bids and Broke Winners," Staff General Research Papers 12665, Iowa State University, Department of Economics.
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  15. Carolyn Pitchik, 1989. "Budget-Constrained Sequential Auctions With Incomplete Information," STICERD - Theoretical Economics Paper Series 201, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  16. Pablo F. Beker & Ángel Hernando-Veciana, 2011. "Persistent markups in bidding markets with financial constraints," Economics Working Papers we1133, Universidad Carlos III, Departamento de Economía.
  17. Aoyagi, Masaki, 2003. "Bid rotation and collusion in repeated auctions," Journal of Economic Theory, Elsevier, vol. 112(1), pages 79-105, September.
  18. Cabral, Luís, 2012. "Oligopoly Dynamics," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 278-282.
  19. Alcalde, José & Dahm, Matthias, 2010. "Rent seeking and rent dissipation: A neutrality result," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 1-7, February.
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