A Theory of Indicative Bidding

Daniel Quint and Kenneth Hendricks

American Economic Journal: Microeconomics, 2018, vol. 10, issue 2, 118-51

Abstract: When selling a business by auction, sellers typically use indicative bids—nonbinding preliminary bids—to select a small number of bidders to conduct due diligence and submit binding offers. We show that if entry into the auction is costly, indicative bids can be informative: symmetric equilibrium exists in weakly increasing strategies, with bidders "pooling" over a finite number of bids. The equilibrium helps the seller select high value bidders with higher likelihood, although the highest value bidders are not always selected. When the number of potential bidders is large, revenue and total surplus are both higher than when entry is unrestricted.

JEL-codes: D44 D83 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/mic.20160290
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Citations: View citations in EconPapers (15)

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