Auctions vs. Negotiations: The Role of the Payment Structure
62 Pages Posted: 11 Jul 2022 Last revised: 11 Sep 2023
Date Written: September 4, 2022
Abstract
We investigate a seller's strategic choice between negotiating with fewer bidders and running an auction with additional bidders, allowing for general security payments. The key factor favoring negotiations is the seller's rent-extraction benefit of setting her preferred payment structure; reserve prices are of secondary importance. Negotiations are more valuable if the seller's asset creates more value at more productive bidders -- in which case sellers prefer contingent payments while bidders prefer cash -- and if the dispersion and magnitude of bidders' private valuations are higher. Our results have implications for mergers and acquisitions, patent licensing, and compensation negotiations in tight labor markets.
Keywords: Negotiations, auctions, competition, optimal mechanism, payment method, mergers and acquisitions, negotiations with employees, compensation structure, patent licensing.
JEL Classification: G32, M52, J54, J33
Suggested Citation: Suggested Citation