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Limited Liability and High Bids in English Auctions

Author

Listed:
  • Wang Tao

    (School of Economics, Zhejiang University, Hangzhou, Zhejiang, China)

  • Wang Ruqu

    (School of Economics, Zhejiang University, Hangzhou, Zhejiang, China)

Abstract

In this paper, we investigate how limited liability affects firms’ bidding behavior in license auctions. We focus on a model where firms first seek financing from banks, then bid for the licenses, and the winning firms set prices in a product market with uncertain demand. In a model of one license, the winning firm becomes a monopoly. A higher bid induces a higher product price. In a model of two licenses, a higher bid provides a positive externality to all other firms. In both models, bids are extremely high in the English auction, and the English auction always generates more revenue than the first-price/discriminatory auction.

Suggested Citation

  • Wang Tao & Wang Ruqu, 2018. "Limited Liability and High Bids in English Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(2), pages 1-12, July.
    • Handle: RePEc:bpj:bejtec:v:18:y:2018:i:2:p:12:n:10
    DOI: 10.1515/bejte-2016-0152
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    References listed on IDEAS

    as
    1. Burguet, Roberto & Ganuza, Juan-José & Hauk, Esther, 2012. "Limited liability and mechanism design in procurement," Games and Economic Behavior, Elsevier, vol. 76(1), pages 15-25.
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    3. Maarten C.W. Janssen & Vladimir A. Karamychev, 2010. "Do auctions select efficient firms?," Economic Journal, Royal Economic Society, vol. 120(549), pages 1319-1344, December.
    4. Marco A. Haan & Linda A. Toolsema, 2011. "License Auctions When Winning Bids Are Financed Through Debt," Journal of Industrial Economics, Wiley Blackwell, vol. 59(2), pages 254-281, June.
    5. Haan, Marco A. & Toolsema, Linda A., 2008. "The strategic use of debt reconsidered," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 616-624, March.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    license bidding; limited liability; auctions; externality; revenue comparison;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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