Do Auctions Select Efficient Firms?

TI Discussion Paper No. 07-001/1

32 Pages Posted: 19 Feb 2007

See all articles by Maarten Janssen

Maarten Janssen

University of Vienna - Faculty of Business, Economics, and Statistics

Vladimir A. Karamychev

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: January 2007

Abstract

This paper considers a government auctioning off multiple licenses to firms who compete in a market after the auction. Firms have different costs, and cost efficiency is private information at the auction stage and the market competition stage. If only one license is auctioned, standard results say that the most efficient firm wins the auction (license) as it will get the highest profit in the aftermarket, i.e., it has the highest valuation for the license. This paper argues that this result does not generalize to the case of multiple licenses and aftermarket competition. In particular, we determine conditions under which auctions may select inefficient firms and therefore lead to an inefficient allocation of resources. Strategic interactions in the aftermarket, in particular firms' preferences to compete with the least cost-efficient firms rather than with the most efficient firms, are responsible for our result.

Keywords: Auctions, cost-efficiency, aftermarkets

JEL Classification: D43, L11, L13

Suggested Citation

Janssen, Maarten C. W. and Karamychev, Vladimir A., Do Auctions Select Efficient Firms? (January 2007). TI Discussion Paper No. 07-001/1, Available at SSRN: https://ssrn.com/abstract=963350 or http://dx.doi.org/10.2139/ssrn.963350

Maarten C. W. Janssen (Contact Author)

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Vladimir A. Karamychev

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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