Essays on the Structural Analysis of Auctions

Abstract

Chapters 1 develops a game-theoretic model to approximate bidders’ behavior in a takeover process, accounting for their valuation discount due to the dissemination of confidential information and their uncertainty about the number of actual opponents. We derive a symmetric Bayesian Nash equilibrium with a strictly increasing bidding strategy, and provide a sufficient condition for the monotonicity of the equilibrium bidding strategy. Finally, we construct the information cost resulting from bidders’ information disclosure discounts and show how it affects the seller’s expected revenue.

Chapter 2 empirically explains why sellers in takeover auctions limit bidders' entry by considering two types of costs incurred by sellers of target companies: the information cost (developed in Chapter 1) and the operation cost. We establish the identification of the model primitives with unobserved heterogeneity, naturally arising from the confidential information. Using a sample with 287 M&A deals of U.S. public companies, we find that the unobserved heterogeneity explains 75.3% of the variation of the value and bidders lower their values by 11.9% for each rival. We further quantify the information cost and operation cost using counterfactual analysis.

Chapter 3 studies the optimal auction design with voluntary entry when entry fees/subsidies are not allowed as a policy instrument, as in most of real-world auctions. In a symmetric IPV paradigm, we find that the optimal mechanism should allocate the asset to the entrant with highest non-negative virtual value with an adjustment for the entry-stage incentivization. The seller can extract additional information rent from the winner as a result of his ability to use a reserve price to induce a desired competition among entrants. Our model embeds Myerson (1981) and Levin and Smith (1994) as special cases.