Auctions of Licenses and Market Structure

Abstract

This paper studies sequential auctions of licenses to operate in a market where those firms that obtain at least one license then engage in a symmetric market game. I employ a new refinement of Nash equilibrium, the concept of Markovian recursively undominated equilibrium. The unique solution satisfies the following properties: 1) when several firms own licenses before the auction (incumbents), new entrants buy licenses in each stage; and 2) when there is no more than one incumbent, either the single firm preempts entry altogether or entry occurs in every stage, depending on the parameter configuration.