A paper on why negotiations often yield better outcomes than auctions by Vladimir Vladimirov in the Journal of Finance
The paper ‘Auctions versus Negotiations: The Role of the Payment Structure' by research fellow Vladimir Vladimirov (University of Amsterdam) and co-author Florian Hoffmann (KU Leuven, Belgium), was published in the Journal of Finance.
In the paper, they study a seller's strategic choice between optimally structured negotiations with fewer bidders and an auction with more competing bidders when payments can have a contingent component, as is common in mergers and acquisitions (M&A), patent licensing, and employee compensation. The key factor favoring negotiations is that it allows the seller to set her preferred payment structure—that is, the revenue-maximizing mix of cash and contingent pay; reserve prices are of secondary importance. Negotiations are more likely to dominate if synergies increase in bidders' productivity types (as with acquirer-target complementarities in M&A). Higher dispersion and magnitude of bidders' private valuations also favor negotiations.
Article citation
Florian Hoffmann and Vladimir Vladimirov, ‘Auctions versus Negotiations: The Role of the Payment Structure', Journal of Finance, Volume 80, Issue 3, June 2025, doi.org/10.1111/jofi.13446.