Entry by Takeover: Auctions vs. Negotiations

Marco Pagnozzi and Antonio Rosato

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We compare two mechanisms through which a potential entrant can take over an incumbent in a market with asymmetric firms: auctions (where other incumbents can bid for the target) and bilateral negotiations between the entrant and the target. The entrant’s choice of target depends on the mechanism, and it may not maximize ex-post profit or consumer welfare. In an auction, the entrant pays a higher price to take over a target with higher synergies, because they impose stronger negative externalities on incumbents and increase their willingness to pay for preventing entry. This provides a new rationale for takeover premia. Auctions increase the price obtained by the target, but reduce welfare compared to negotiation because they may discourage the entrant from acquiring a target with higher synergies.

Keywords: Takeover; Mergers; Auctions with Externalities (search for similar items in EconPapers)
JEL-codes: D44 G34 L13 (search for similar items in EconPapers)
Date: 2014-01-27
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in International Journal of Industrial Organization, 2016, vol. 44, pp. 68-84

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:353

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