On the Right-of-First-Refusal

Sushil Bikhchandani, Steven A. Lippman and Reade Ryan
Additional contact information
Steven A. Lippman: UCLA
Reade Ryan: Amaranth, LLC

The B.E. Journal of Theoretical Economics, 2005, vol. advances.5, issue 1

Abstract: When the seller of an asset grants a right-of-first-refusal to a buyer, this special buyer has the opportunity to purchase the asset at the best price the seller can obtain from the other potential buyers. We show that the right-of-first-refusal is inefficient, and it benefits the special buyer at the expense of the seller and other buyers. In a private values model, the benefit the special buyer obtains via the right-of-first-refusal equals the cost to the seller. When buyers' valuations are correlated, the presence of a special buyer exacerbates the winner's curse on regular buyers. Consequently, the special buyer's expected gain from the right-of-first-refusal is often less than the expected loss to the seller. Thus, our analysis suggests that the seller should exercise considerable caution prior to deciding whether to grant this right to a buyer.

Keywords: pricing; contracts; right-of-first-refusal; meet-the-competition clause (search for similar items in EconPapers)
JEL-codes: D4 L11 L14 (search for similar items in EconPapers)
Date: 2005

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Persistent link: http://EconPapers.repec.org/RePEc:bpj:bejtec:v:advances.5:y:2005:i:1:n:4

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