Mergers in Bidding Markets

Posted by D. Daniel Sokol

Maarten Janssen, University of Vienna and Vladimir A. Karamychev, Erasmus University Rotterdam (EUR) – Erasmus School of Economics (ESE) investigate Mergers in Bidding Markets

ABSTRACT: We analyze the effects of mergers in first-price sealed-bid auctions on bidders’ equilibrium bidding functions and on revenue. We also study the incentives of bidders to merge given the private information they have. We develop two models, depending on how after-merger valuations are created. In the first, single-aspect model, the valuation of the merged firm is the maximum of the valuations of the two firms engaged in the merger. In the multi-aspect model, a bidder’s valuation is the sum of two components and a merged firm chooses the maximum of each component of the two merging firms. In the first model, a merger creates incentives for bidders to shade their bids leading to lower revenue. In the second model, the non-merging firms do not shade their bids and revenue is actually higher. In both models, we show that all bidders have an incentive to merge.