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License Prices for Financially Constrained Firms

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  • Roberto Burguet
  • R. Preston McAfee

Abstract

It is often alleged that high auction prices inhibit build-out. We investigate this claim under the extreme case of budget-constrained bidders. Low prices maximize overall the gains from trade. If there are n licenses, the price where the budget constraint just binds maximizes consumer surplus if the elasticity of demand is less than one plus 1/n. If demand is elastic, auctions maximize consumer surplus when build-out expenditure greater than one over the elasticity of demand. This appears to be true for most of the auctions run.

Suggested Citation

  • Roberto Burguet & R. Preston McAfee, 2005. "License Prices for Financially Constrained Firms," Working Papers 224, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:224
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    References listed on IDEAS

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    Cited by:

    1. Pitchik, Carolyn, 2009. "Budget-constrained sequential auctions with incomplete information," Games and Economic Behavior, Elsevier, vol. 66(2), pages 928-949, July.
    2. Kai Konrad, 2012. "Information alliances in contests with budget limits," Public Choice, Springer, vol. 151(3), pages 679-693, June.
    3. Masili, Gustavo, 2006. "Auction with aftermarket for budget constrained bidders," MPRA Paper 2134, University Library of Munich, Germany.
    4. Francesco Giovannoni & Miltiadis Makris, 2014. "Reputational Bidding," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(3), pages 693-710, August.
    5. Kuroda, Toshifumi & Baquero Forero, Maria del Pilar, 2017. "The effects of spectrum allocation mechanisms on market outcomes: Auctions vs beauty contests," Telecommunications Policy, Elsevier, vol. 41(5), pages 341-354.
    6. Nicolas Melissas, 2008. "Bidding and Drilling on Offshore Wildcat Tracts," Working Papers 0805, Centro de Investigacion Economica, ITAM.
    7. Sano, Ryuji, 2023. "Post-auction investment by financially constrained bidders," Journal of Economic Theory, Elsevier, vol. 213(C).

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    More about this item

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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