Applying the Lessons of Auction Theory to the Analysis of Mergers in Bidding Markets
30 May 2007
By Dr. G. Steven Olley
In the area of antitrust, analyses of bidding markets and auctions often are motivated by concerns about alleged bid rigging or price fixing. However, there is increasing interest in applying auction theory to understand the competitive implications of proposed mergers and acquisitions. Are bidding markets different? Is competition necessarily more aggressive when there are more bidders?
In this chapter from Economics of Antitrust: Complex Issues In a Dynamic Economy, NERA Vice President Dr. G. Steven Olley surveys some of the economic literature on auction theory and the auction-based empirical tests that can be used to assess the likely competitive effects of a merger between firms that bid for the right to supply customers. Although it is often claimed that the conventional relationship between market structure and performance does not apply in bidding markets, Dr. Olley explains why this is not necessarily the case. Depending on the dynamics of the bidding or auction process at work -- that is, whether the bidding can be characterized as a private value auction or a common value auction -- a reduction in the number of bidders may or may not lead to a reduction in competition. The particulars surrounding the bidding process also matter because they have implications for the specific empirical analysis that can be applied to quantify the relationship between the number of bidders and prices, which is one of the keys to assessing the competitive implications of a proposed merger or acquisition.
