Auctions vs. Negotiations: The Role of the Payment Structure

Florian Hoffmann and Vladimir Vladimirov

No 20703, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We investigate a seller's strategic choice between optimally-structured negotiations with fewer bidders and an auction with more competing bidders when payments can have a contingent component, as is common in mergers and acquisitions, patent licensing, and employee compensation. The key factor favoring negotiations is that it allows the seller to set her preferred payment structure ---i.e., the revenue-maximizing mix of cash and contingent pay; reserve prices are of secondary importance. Negotiations are more likely to dominate if synergies increase in bidders' productivity types (as with acquirer-target complementarities in M&A). Higher dispersion and magnitude of bidders' private valuations also favor negotiations.

Keywords: Negotiations (search for similar items in EconPapers)
JEL-codes: G32 J33 J54 M52 (search for similar items in EconPapers)
Date: 2025-10
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