The scope of auctions in the presence of downstream interactions and information externalities

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. Terms of use: Documents in EconStor mayJEL-Code: D440, D820.

A consumer-surplus standard in foreign acquisitions, foreign direct investment, and welfare

“…The second part of the study can be related, to some extent, to the literature on auctions with externalities. Koska et al (2017), for instance, show that if the target firms are ex ante heterogeneous in their production costs that are their private information, then any auction mechanism that separates costs will lead to a commitment problem on the investor's part. Jehiel and Moldovanu (2000) look at the sale of a cost-reducing innovation, which generates negative externalities on other firms, in a second-price, sealed-bid auction; and Goeree (2003) considers an auction setup for a cost-reducing patent, and finds an upward bias on the equilibrium bidding strategies, especially when bidders signal their private information via the winning bid.…”

Gains from multinational competition for cross-border firm acquisition

“…The model considers a host country market initially served by a monopoly local firm, denoted firm l. Following the stylized facts on multinationals such that their intangible assets enable them to penetrate oligopolistic markets, the model assumes that entry to this market is restricted: that is, similar to Koska (2019) and Koska et al (2018a), firms that are willing to produce for this market need Z units of a specific factor to develop intangible assets within firm boundaries so as to be able to produce at all. The aggregate supply of this factor is strictly less than 4Z and the outside option of this factor determines its wage, which is normalized to unity.…”

“…The literature is, however, silent on whether host countries that liberalize trade and remove restrictions on foreign ownership can avoid 3 Helpman et al (2004) document that some firms may prefer FDI over exporting also in situations where trade is liberalized, so long as there are sufficient transport costs. Alternatively, Koska et al (2018a) show that if there is ex ante incomplete cost information, and if FDI can serve as a signal of high productivity, then greenfield FDI can be optimal even when trade and transport costs are zero. Similarly, Koska (2019) finds that also FDI through acquisition of a local firm can be the optimal entry mode in the times of complete trade liberalization.…”