Indicative Bidding in Auctions with Costly Entry∗

When selling a business by auction, investment banks frequently use indicative bids – non-binding preliminary bids – to select a limited number of bidders to participate. We show that if participation is costly, indicative bids can be informative: symmetric equilibrium exists in weakly-increasing strategies, but bidders “pool” over a finite number of bids, so the highest-value bidders are not always selected. We construct such equilibria for both first-price and English auctions. We also characterize equilibrium play when the number of potential bidders is large, and show that both revenue and bidder surplus are higher than when entry is unrestricted. ∗The authors thank Serafin Grundl for excellent research assistantship, and Eric Budish, Peter Cramton, Navin Kartik, Paulo Somaini, Sheridan Titman, and attendees at numerous seminars and conferences for helpful comments.