Preemptive bidding in takeover auctions with affiliated values

This paper extends Fishman's (1988) model of preemptive bidding in takeover auctions to auctions with affiliated values. It shows that preemptive bidding transfers wealth from the seller to the first bidder without affecting the profit of the second bidder and social welfare. It also shows that higher correlation between bidders’ values leads to higher preemption rates but has an ambiguous effect on the size of the opening bid. Finally, it shows that in auctions with affiliated values, even infinitesimal entry costs may lead to a preemptive jump bidding that allows the reallocation of the entire surplus from the seller to the first bidder.