DP7411 Why Do Sellers (Usually) Prefer Auctions?

Author(s): Jeremy I. Bulow, Paul Klemperer
Publication Date: August 2009
Keyword(s): Auctions, entry, jump bidding, procurement, sequential sales
JEL(s): D44, G34, L13
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7411

We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether or not to enter the bidding. The sequential process is always more efficient. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry - precisely because of its inefficiency - it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc.