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License Auctions When Winning Bids Are Financed Through Debt

  • MARCO A. HAAN
  • LINDA A. TOOLSEMA

We study an auction where two licenses to operate on a new market are sold. Winners finance their bids on a competitive debt market. Due to limited liability, the amount of debt affects their behavior on the product market. In equilibrium, consumer prices are lower than with a beauty contest, where firms obtain their licenses for free. Winning bids are lower than in a model where firms have internal funds. Higher bids cannot be financed due to credit rationing. Expected net firm profits are strictly positive, although firms are a priori identical and have the same information.

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Article provided by Wiley Blackwell in its journal The Journal of Industrial Economics.

Volume (Year): 59 (2011)
Issue (Month): 2 (06)
Pages: 254-281

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Handle: RePEc:bla:jindec:v:59:y:2011:i:2:p:254-281
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  1. van Damme, Eric, 2002. "The European UMTS-auctions," European Economic Review, Elsevier, vol. 46(4-5), pages 846-858, May.
  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. Wolfstetter, Elmar, 1996. " Auctions: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 10(4), pages 367-420, December.
  4. Tilman Börgers & Christian Dustmann, 2003. "Awarding telecom licences: the recent European experience," Economic Policy, CEPR;CES;MSH, vol. 18(36), pages 215-268, 04.
  5. Zheng, Charles Z., 2001. "High Bids and Broke Winners," Journal of Economic Theory, Elsevier, vol. 100(1), pages 129-171, September.
  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. John McMillan, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-162, Summer.
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