License auctions when winning bids are financed through debt

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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. We compare our results to those of a beauty contest and a standard auction. For the case that debt induces firms to compete more aggressively, we find that consumer prices are lower, and expected firm profits are strictly positive although firms are a priori identical. When debt induces firms to compete less aggressively, we find that firms make zero profits, and consumer prices are higher.
Original languageEnglish
Place of PublicationGroningen
PublisherUniversity of Groningen
Number of pages45
Publication statusPublished - 2006

Keywords

  • Oligopoly
  • Debt
  • License Auctions
  • D44, D45, L13

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