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License Auctions When Winning Bids Are Financed Through Debt

Listed author(s):
  • 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
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-1821

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References listed on IDEAS
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  1. Paul Milgrom, 2000. "Putting Auction Theory to Work: The Simultaneous Ascending Auction," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 245-272, April.
  2. Klemperer, P., 1999. "Auction Theory: a Guide to the Literature," Economics Papers 1999-w12, Economics Group, Nuffield College, University of Oxford.
  3. repec:oxf:wpaper:1999-w12 is not listed on IDEAS
  4. Matthew J. Clayton & S. Abraham Ravid, 2002. "The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 723-750.
  5. van Damme, E.E.C., 2002. "The European UMTS-auctions," Other publications TiSEM 6194adbb-6fa3-4fc0-ae52-a, Tilburg University, School of Economics and Management.
  6. Goeree, Jacob K., 2003. "Bidding for the future: signaling in auctions with an aftermarket," Journal of Economic Theory, Elsevier, vol. 108(2), pages 345-364, February.
  7. Wolfstetter, Elmar, 1996. " Auctions: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 10(4), pages 367-420, December.
  8. Chowdhry, Bhagwan & Nanda, Vikram, 1993. " The Strategic Role of Debt in Takeover Contests," Journal of Finance, American Finance Association, vol. 48(2), pages 731-745, June.
  9. John McMillan, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-162, Summer.
  10. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-653, June.
  11. R. Preston McAfee & John McMillan, 1996. "Analyzing the Airwaves Auction," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 159-175, Winter.
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