Abstract

http://ssrn.com/abstract=1262519
 
 

References (35)



 


 



Mergers in Auctions with an Incumbent Advantage


Luke Froeb


Vanderbilt University - Strategy and Business Economics

Mikhael Shor


University of Connecticut Department of Economics

Steven Tschantz


Vanderbilt University - Department of Mathematics

September 2, 2008

Vanderbilt Law and Economics Research Paper No. 08-24

Abstract:     
When the winner of one auction gains a cost advantage in the next, bids reflect not only the value of winning the auction, but also the value of gaining an incumbent advantage in future auctions. If a larger firm's advantage derives from a cost or product advantage, it has a greater chance of holding onto incumbency status which, in turn, increases the value it places on gaining incumbency. As a consequence, larger firms bid more aggressively than their smaller rivals, where "size" is measured by the probability of winning. In this environment, mergers eliminate competition among the merged firms but they also change bidding behavior by both merging and non-merging firms. Computational experiments suggest that the scope for pro-competitive mergers is much wider than in auctions without an incumbent advantage. In particular, mergers among smaller firms are likely to be pro-competitive because they tend to create better losers, i.e., firms who bid more aggressively but still lose a large part of the time.

Number of Pages in PDF File: 20

Keywords: dynamic game, auction, incumbent advantage, switching cost, antitrust

JEL Classification: D44, C72, L41

working papers series


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Date posted: September 3, 2008  

Suggested Citation

Froeb, Luke and Shor, Mikhael and Tschantz, Steven, Mergers in Auctions with an Incumbent Advantage (September 2, 2008). Vanderbilt Law and Economics Research Paper No. 08-24. Available at SSRN: http://ssrn.com/abstract=1262519 or http://dx.doi.org/10.2139/ssrn.1262519

Contact Information

Luke M. Froeb (Contact Author)
Vanderbilt University - Strategy and Business Economics ( email )
Nashville, TN 37203
United States
615-322-9057 (Phone)
615-343-7177 (Fax)

Mikhael Shor
University of Connecticut Department of Economics ( email )
341 Mansfield Road
Storrs, CT 06269
United States
HOME PAGE: http://www.mikeshor.com/
Steven T. Tschantz
Vanderbilt University - Department of Mathematics ( email )
Nashville, TN 37240
United States
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