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Lease Auctions with Retention Options

Author

Listed:
  • Pranjal Chandrakar

    (Mahindra University)

  • Shubhabrata Das

    (Decision Science, Indian Institute of Management Bangalore)

  • Manaswini Bhalla

    (Economics and Social Sciences, Indian Institute of Management Bangalore)

Abstract

When a lease expires, the lessor can choose between auctioning it and offering the retention option to the current leaseholder. In the latter case, the leaseholder gets the opportunity to retain or renew the lease by paying the retention price, as decided by the lessor. However, if a leaseholder declines the retention option, the concerned lease is re-allocated via auction. This study compares a lessor’s revenue when it offers the retention option against that when it does not. Retention options prompt academic interest as they are often used to allocate coal, oil, and other mines. They are also used to assign players’ services in sports tournaments like the Indian Premier League (IPL). We study three game-theoretic models with varying assumptions (number of leases, complete/incomplete information, etc.) to achieve the aforementioned objective. In each game, we find the leaseholder’s equilibrium retention strategy and lessor’s expected revenue. We find that retention options help increase the lessor’s revenue when competition among the leaseholder is low. Otherwise, auctioning the leases fetches more revenue.

Suggested Citation

  • Pranjal Chandrakar & Shubhabrata Das & Manaswini Bhalla, 2022. "Lease Auctions with Retention Options," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(1), pages 97-136, March.
    • Handle: RePEc:spr:jqecon:v:20:y:2022:i:1:d:10.1007_s40953-021-00279-3
    DOI: 10.1007/s40953-021-00279-3
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    References listed on IDEAS

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    1. Stanley Reynolds & John Wooders, 2009. "Auctions with a buy price," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(1), pages 9-39, January.
    2. Jean-Pierre Benoît & Vijay Krishna, 2001. "Multiple-Object Auctions with Budget Constrained Bidders," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 155-179.
    3. Krishna, Kala, 1993. "Auctions with Endogenous Valuations: The Persistence of Monopoly Revisited," American Economic Review, American Economic Association, vol. 83(1), pages 147-160, March.
    4. Jong-Rong Chen & Kong-Pin Chen & Chien-Fu Chou & Ching-I Huang, 2013. "A Dynamic Model of Auctions with Buy-It-Now: Theory and Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 61(2), pages 393-429, June.
    5. Sunnevag, Kjell J., 2000. "Designing auctions for offshore petroleum lease allocation," Resources Policy, Elsevier, vol. 26(1), pages 3-16, March.
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    More about this item

    Keywords

    English auction; Lease allocation; Lease renewal; Lease retention; Retention price; Retention strategy;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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