License auctions when winning bids are financed through debt

Marco Haan and Linda A. Toolsema
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Linda A. Toolsema: Groningen University

No 200310, CCSO Working Papers from University of Groningen, CCSO Centre for Economic Research

Abstract: We study an auction where two licenses to operate on a new market are sold. Winners finance their bids on a competitive debt market. Due to limited liability, the amount of debt affects their behavior on the product market. In equilibrium, consumer prices are lower than with a beauty contest, where firms obtain their licenses for free. Winning bids are lower than in a model where firms have internal funds. Higher bids cannot be financed due to credit rationing. Expected net firm profits are strictly positive, although firms are a priori identical and have the same information.

Date: 2003
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Related works:
Journal Article: LICENSE AUCTIONS WHEN WINNING BIDS ARE FINANCED THROUGH DEBT (2011)
Working Paper: License auctions when winning bids are financed through debt (2006)
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