Auctions vs. Negotiations: The Role of the Payment Structure

62 Pages Posted: 11 Jul 2022 Last revised: 11 Sep 2023

See all articles by Florian Hoffmann

Florian Hoffmann

KU Leuven

Vladimir Vladimirov

University of Amsterdam Business School; Centre for Economic Policy Research (CEPR); Finance Theory Group (FTG)

Date Written: September 4, 2022

Abstract

We investigate a seller's strategic choice between negotiating with fewer bidders and running an auction with additional bidders, allowing for general security payments. The key factor favoring negotiations is the seller's rent-extraction benefit of setting her preferred payment structure; reserve prices are of secondary importance. Negotiations are more valuable if the seller's asset creates more value at more productive bidders -- in which case sellers prefer contingent payments while bidders prefer cash -- and if the dispersion and magnitude of bidders' private valuations are higher. Our results have implications for mergers and acquisitions, patent licensing, and compensation negotiations in tight labor markets.

Keywords: Negotiations, auctions, competition, optimal mechanism, payment method, mergers and acquisitions, negotiations with employees, compensation structure, patent licensing.

JEL Classification: G32, M52, J54, J33

Suggested Citation

Hoffmann, Florian and Vladimirov, Vladimir, Auctions vs. Negotiations: The Role of the Payment Structure (September 4, 2022). Available at SSRN: https://ssrn.com/abstract=4150242 or http://dx.doi.org/10.2139/ssrn.4150242

Florian Hoffmann

KU Leuven ( email )

Naamsestraat 69
Box 3525
Leuven, 3000
Belgium

HOME PAGE: http://www.florian-hoffmann.com

Vladimir Vladimirov (Contact Author)

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Finance Theory Group (FTG) ( email )

United States

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