TL;DRAbstract
When selling a business by auction, investment banks frequently use indicative bids – nonbinding preliminary bids – to select a limited number of bidders for participation in the auction. We show that if participation in the auction is costly, indicative bids can be informative: a (essentially unique) symmetric equilibrium exists in weakly-monotone strategies; but bidder types “pool ” over a finite number of bids, so the highest-value bidders are not always selected. We show how equilibrium changes with the number of potential bidders and the participation cost. We also characterize equilibrium play when the number of potential bidders is large, and show that both revenue and bidder surplus are higher than when entry into the auction is unrestricted. 1 1
Chat with Paper
AI Agents for this Paper
When selling a business by auction, investment banks frequently use indicative bids – nonbinding preliminary bids – to select a limited number of bidders for participation in the auction. We show that if participation in the auction is costly, indicative bids can be informative: a (essentially unique) symmetric equilibrium exists in weakly-monotone strategies; but bidder types “pool ” over a finite number of bids, so the highest-value bidders are not always selected. We show how equilibrium changes with the number of potential bidders and the participation cost. We also characterize equilibrium play when the number of potential bidders is large, and show that both revenue and bidder surplus are higher than when entry into the auction is unrestricted. 1 1
Chat
Click to start Chat