American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
A Theory of Indicative Bidding
American Economic Journal: Microeconomics
vol. 10,
no. 2, May 2018
(pp. 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.Citation
Quint, Daniel, and Kenneth Hendricks. 2018. "A Theory of Indicative Bidding." American Economic Journal: Microeconomics, 10 (2): 118–51. DOI: 10.1257/mic.20160290Additional Materials
JEL Classification
- D44 Auctions
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
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