The scope of auctions in the presence of downstream interactions and information externalities


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KOSKA A. O. , Onur I., Staehler F.

JOURNAL OF ECONOMICS, vol.125, no.2, pp.107-136, 2018 (Journal Indexed in SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 125 Issue: 2
  • Publication Date: 2018
  • Doi Number: 10.1007/s00712-017-0590-0
  • Title of Journal : JOURNAL OF ECONOMICS
  • Page Numbers: pp.107-136

Abstract

We scrutinize the scope of auctions for firm acquisitions in the presence of downstream interactions and information externalities. We show that no mechanism exists that allows an investor to acquire a low-cost firm under incomplete information: a separating auction implies adverse selection and relies substantially on commitment to allocation and transfer rules. A pooling auction serves as a commitment device against ex-post opportunistic behavior and alleviates adverse selection. It can earn the investor a higher expected payoff than a separating auction, even when consistency is required as to qualify for a sequential equilibrium.