Auctions Versus Negotiations

TLDR

Auction theory draws on monopoly theory, with an English auction price equaling the lowest competitive price and optimal auctions modeling the seller as a monopolist who can choose any mechanism. The study compares the profitability of a no‑reserve auction to an optimally‑structured negotiation with one fewer bidder. It uses analogies between monopoly and auction theory to derive new auction results. Under independent signals, auctions are always preferable; with affiliated signals this holds under restrictions on the negotiation mechanism, implying negotiating skill is less valuable than extra competition.

Abstract

Which is the more profitable way to sell a company: an auction with no reserve price or an optimally-structured negotiation with one less bidder? We show under reasonable assumptions that the auction is always preferable when bidders' signals are independent. For affiliated signals, the result holds under certain restrictions on the seller's choice of negotiating mechanism. The result suggests that the value of negotiating skill is small relative to the value of additional competition. The paper also shows how the analogies between monopoly theory and auction theory can help derive new results in auction theory. (JEL D44, G34) There are close analogies between standard price theory and the theory of auctions. In an absolute English auction, in which the price rises continuously until only one bidder remains and the seller is required to accept the final bid, the sale price equals the lowest competitive price at which supply equals demand. In the theory of optimal auctions the seller is treated as a monopolist who can choose any