Why Do Sellers (Usually) Prefer Auctions?,
Abstract (Via Harvard Law)
We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether or not to enter the bidding. The sequential process is always more efficient. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry – precisely because of its inefficiency – it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc.
Excerpt (Via Harvard Law)
Our central result is that the straightforward, level-playing-field competition that an auction creates is usually more profitable for a seller than a sequential process, even though the sequential mechanism is always more efficient in expectation (as measured by the winner’s expected value less expected aggregate entry costs). Bidders, by contrast, usually prefer to subvert an auction by making pre-emptive “jump bids” when they can. The sequential process is more efficient because although it attracts fewer bidders in expectation, it attracts more bidders when those bidders are most valuable – the existence or absence of early bids informs subsequent entry decisions and attracts additional bidders when the early ones turn out to be weak. But buyers’ ability to make pre-emptive jump bids, which inefficiently deter too many potential rivals from entering, harms the seller.