American Economic Review: Vol. 99 No. 4 (September 2009)


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Why Do Sellers (Usually) Prefer Auctions?

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Bulow, Jeremy, and Paul Klemperer. 2009. "Why Do Sellers (Usually) Prefer Auctions?" American Economic Review, 99(4): 1544-75.

DOI: 10.1257/aer.99.4.1544


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 to enter the bidding. The sequential process is always more efficient. But preemptive 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. (JEL D44, G34, L13)

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Bulow, Jeremy (Stanford U)
Klemperer, Paul (Nuffield College, U Oxford)

JEL Classifications

D44: Auctions
G34: Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
L13: Oligopoly and Other Imperfect Markets

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