The Optimal Design of Ipos: Price vs Quantity Discrimination

Abstract

This paper provides theoretical support to the use of the uniform pricing rule in the IPOs procedures. In particular, by using an optimal auction approach, we are able to fully characterize the optimal IPO mechanism in a very general informational environment. Our results show that: 1) the optimal IPO can be implemented through a uniform price across all the investors; 2) the optimal allocation rule is such that when the informed investors reveal too bad news, the seller awards the shares to the retail investors; 3) in case of an oversubscription of the issue, the rationing scheme is a linear translation of the optimal allocation rule, i.e. all investors are rationed by the same quantity of shares.

Keywords: Initial public offering, price discrimination, rationing, optimal auction

JEL Classification: D8, G2