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The Scope of Auctions in the Presence of Downstream Interactions and Information Externalities

33 Pages Posted: 9 Apr 2015  

Onur A. Koska

University of Tuebingen - Department of Economics

Ilke Onur

University of South Australia

Frank Stahler

University of Tuebingen

Date Written: March 30, 2015

Abstract

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

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

Onur A. Koska

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Ilke Onur

University of South Australia ( email )

Adelaide, South Australia 5001
Australia

HOME PAGE: http://https://ilkeonur.weebly.com/

Frank Stahler (Contact Author)

University of Tuebingen ( email )

Eberhard Karls Universität
Geschwister-Scholl-Platz
Tübingen, 72074
Germany

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