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A Theory of Indicative Bidding†

A Theory of Indicative Bidding† AbstractWhen selling a business by auction, sellers typically use indicative bids—nonbinding preliminary bids—to select a small number of bidders to conduct due diligence and submit binding offers. We show that if entry into the auction is costly, indicative bids can be informative: symmetric equilibrium exists in weakly increasing strategies, with bidders “pooling” over a finite number of bids. The equilibrium helps the seller select high value bidders with higher likelihood, although the highest value bidders are not always selected. When the number of potential bidders is large, revenue and total surplus are both higher than when entry is unrestricted. (JEL D44, D83) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

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Publisher
American Economic Association
Copyright
Copyright © 2018 © American Economic Association
ISSN
1945-7685
DOI
10.1257/mic.20160290
Publisher site
See Article on Publisher Site

Abstract

AbstractWhen selling a business by auction, sellers typically use indicative bids—nonbinding preliminary bids—to select a small number of bidders to conduct due diligence and submit binding offers. We show that if entry into the auction is costly, indicative bids can be informative: symmetric equilibrium exists in weakly increasing strategies, with bidders “pooling” over a finite number of bids. The equilibrium helps the seller select high value bidders with higher likelihood, although the highest value bidders are not always selected. When the number of potential bidders is large, revenue and total surplus are both higher than when entry is unrestricted. (JEL D44, D83)

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: May 1, 2018

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