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LICENSE AUCTIONS WHEN WINNING BIDS ARE FINANCED THROUGH DEBT

Authors


  • *The authors thank three anonymous referees, the Editor, Esther Hauk, Tobias Kretschmer, Allard van der Made, José Luis Moraga-González, Sander Onderstal, Bert Schoonbeek, participants of the SOM Workshop ‘Competition and Market Power’ in 2002 in Groningen; IIOC 2003 in Boston; NASM 2003 in Chicago; ESEM 2003 in Stockholm; EARIE 2003 in Helsinki; the Kiel Workshop on the Economics of Information and Network Industries 2003; NAKE Day 2003 in Amsterdam; APEA 2005 in Tokyo, and seminar participants at the universities of Groningen, Amsterdam and York for useful comments and discussion.

Abstract

We study an auction where two licenses to operate on a new market are sold and winning bidders finance their bids on the debt market. Higher bids imply higher debts which affects product market competition. When debt induces firms to compete more aggressively, retail prices are lower than in a model without debt, as are auction revenues. When debt induces firms to compete less aggressively, retail prices are higher than in a model without debt, and the effect on auction revenues is ambiguous. Net firm profits are always higher than in a model without debt due to endogenous credit rationing.

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