LICENSE AUCTIONS WHEN WINNING BIDS ARE FINANCED THROUGH DEBT* |
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| Authors: | MARCO A HAAN LINDA A TOOLSEMA |
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| Institution: | 1. IEEF, Faculty of Economics and Business, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands.e‐mail: m.a.haan@rug.nl;2. COELO and IEEF, Faculty of Economics and Business, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands.e‐mail: l.a.toolsema@rug.nl |
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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. 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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