A Theory of Indicative Bidding∗

When selling a business by auction, sellers typically use indicative bids – non-binding preliminary bids – to select a small number of bidders to conduct due diligence and submit binding offers. We show that if entry into the auction is costly, indicative bids can be informative: symmetric equilibrium exists in weakly-increasing strategies, with bidders “pooling” over a finite number of bids. The equilibrium helps the seller select high-value bidders with higher likelihood, although the highest-value bidders are not always selected. When the number of potential bidders is large, revenue and total surplus are both 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. An earlier version of this paper was titled “Indicative Bidding in Auctions with Costly Entry.”