33 Pages Posted: 9 Apr 2015
Date Written: March 30, 2015
We scrutinize the scope of auctions in the presence of downstream interactions and information externalities by using the topical example of a firm acquisition. 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.
Keywords: takeover, auction, externality, incomplete information, commitment
JEL Classification: D440, D820
Suggested Citation: Suggested Citation
Koska, Onur A. and Onur, Ilke and Stahler, Frank, The Scope of Auctions in the Presence of Downstream Interactions and Information Externalities (March 30, 2015). CESifo Working Paper Series No. 5256. Available at SSRN: https://ssrn.com/abstract=2591838