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Entry by takeover: Auctions vs. bilateral negotiations

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  • Pagnozzi, Marco
  • Rosato, Antonio

Abstract

Firms often enter new markets by taking over an incumbent. We analyze a potential entrant's choice of target under two (exogenously given) takeover mechanisms: (i) auctions, where other incumbents can bid for the target against the entrant, and (ii) bilateral negotiations between the entrant and the target. The entrant's choice of target depends on the mechanism, and it may not maximize its ex-post profit (nor consumer welfare). In an auction, the entrant pays a higher price to take over a target with higher synergies, because these impose stronger negative externalities on incumbents and increase their willingness to pay for preventing entry. Auctions increase the price obtained by the target, but reduce welfare compared to negotiations because they may discourage the entrant from acquiring a target with higher synergies.

Suggested Citation

  • Pagnozzi, Marco & Rosato, Antonio, 2016. "Entry by takeover: Auctions vs. bilateral negotiations," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 68-84.
  • Handle: RePEc:eee:indorg:v:44:y:2016:i:c:p:68-84
    DOI: 10.1016/j.ijindorg.2015.10.009
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    Cited by:

    1. Onur A. Koska, 2016. "A Consumer-Surplus Standard in Merger Approvals, Foreign Direct Investment, and Welfare," ERC Working Papers 1612, ERC - Economic Research Center, Middle East Technical University, revised Oct 2016.
    2. Bacchiega, Emanuele & Bonroy, Olivier & Petrakis, Emmanuel, 2020. "Auctions vs. negotiations in vertically related markets," Economics Letters, Elsevier, vol. 192(C).
    3. Herweg, Fabian & Schmidt, Klaus M., 2017. "Auctions versus Negotiations," Rationality and Competition Discussion Paper Series 12, CRC TRR 190 Rationality and Competition.
    4. Onur A. Koska & Ilke Onur & Frank Stähler, 2018. "The scope of auctions in the presence of downstream interactions and information externalities," Journal of Economics, Springer, vol. 125(2), pages 107-136, October.
    5. Onur A. Koska, 2019. "A consumer-surplus standard in foreign acquisitions, foreign direct investment, and welfare," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 155(1), pages 149-179, February.

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    More about this item

    Keywords

    Entry; Mergers; Takeovers; Auctions with externalities;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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