Auctions of Licences and Market Structure

Abstract

This paper studies sequential auctions of licences to operate in a market where those firms that obtain at least one licence then engage in a symmetric market game. I employ a new refinement of Nash equilibrium, the concept of {\sl Markovian recursively undominated equilibrium}. The unique solution satisfies the following properties: (i) when several firms own licences before the auction (incumbents), new entrants buy licences in each stage, and (ii) 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.