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Comcast Buys Sky in a Blind, First Price Auction


In late September, Comcast successfully bought part of Sky PLC in a blind, first price auction for 38.8 billion dollars after entering into a bidding war with Fox during the preceding weeks. Though Comcast won the auction, most analysts believe that Comcast overpaid for Sky. Contributing factors may have included included the fact that a bidding war preceded the auction and that Comcast had already lost a bidding war to buy Fox earlier. Only time will tell if the deal ends up being beneficial for Comcast.

Auction theory holds that it is never a dominant strategy to bid one’s true value in a first price blind auction because that would cause the payoffs for winning and losing the auction to both be 0. Did Comcast get pressured into overpaying for Sky? It seems unlikely. Assuming that Comcast is a rational company, there is no way that the people in charge of the bidding failed to follow this auction logic and accidentally overpaid. However, there is further analysis to be done. We know that one’s bid in a first price auction depends on the number of other bidders. In theory, having more bidders will increase the likelihood that some other bidder’s bid will fall between one’s bid and one’s true value, which makes it necessary to bid closer to one’s true value. But this auction only involved two bidders. Why would Comcast overpay?

Thus it is also worth analyzing the true nature of the Comcast-Fox blind, first price auction. Although it was supposed to be blind, the fact that the two companies had exchanged in an open bidding war beforehand made the auction significantly less blind than suggested by the title. Both companies approximately knew the minimum bid that the other company was willing to place. This increased the bid that each company had to make to secure a good chace of winning.

In addition, we did our in-class auction analysis on goods whose value is much easier to quantify. The long term benefits of buying a company are hard to quantify. Now it makes sense why Comcast might have paid more than expected.



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October 2018