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Mergers in Auctions with an Incumbent Advantage

20 Pages Posted: 3 Sep 2008  

Luke Froeb

Vanderbilt University - Strategy and Business Economics

Mikhael Shor

University of Connecticut Department of Economics

Steven Tschantz

Vanderbilt University - Department of Mathematics

Date Written: September 2, 2008

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.

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

JEL Classification: D44, C72, L41

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: https://ssrn.com/abstract=1262519 or http://dx.doi.org/10.2139/ssrn.1262519

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 )

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
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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