Abstract

Abstract In this paper, we investigate how limited liability affects firms’ bidding behavior in license auctions. We focus on a model where firms first seek financing from banks, then bid for the licenses, and the winning firms set prices in a product market with uncertain demand. In a model of one license, the winning firm becomes a monopoly. A higher bid induces a higher product price. In a model of two licenses, a higher bid provides a positive externality to all other firms. In both models, bids are extremely high in the English auction, and the English auction always generates more revenue than the first-price/discriminatory auction.

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