Auctions vs. Negotiations

22 Pages Posted: 21 Dec 2000 Last revised: 16 Aug 2010

See all articles by Jeremy Bulow

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

Paul Klemperer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: January 1994

Abstract

Which is the more profitable way to sell a company: a public auction or an optimally structured negotiation with a smaller number of bidders? We show that under standard assumptions the public auction is always preferable, even if it forfeits all the seller's negotiating power, including the ability to withdraw the object from sale, provided that it attracts at least one extra bidder. An immediate public auction also dominates negotiating while maintaining the right to hold an auction subsequently with more bidders. The results hold for both the standard independent private values model and a common values model. They suggest that the value of negotiating skill is small relative to the value of additional competition.

Suggested Citation

Bulow, Jeremy I. and Klemperer, Paul, Auctions vs. Negotiations (January 1994). NBER Working Paper No. w4608. Available at SSRN: https://ssrn.com/abstract=253139

Jeremy I. Bulow (Contact Author)

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Paul Klemperer

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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