Consequences of Selling Lower Than Market-Clearing Price
Ten years ago, Google first debuted in the stock market. Investors complained that they received only approximately 75% of the stock they were willing to buy as a result of a modified Dutch auction. Google decided to sell its stock via a modified Dutch auction, in which the stock was sold at a price less than the market-clearing price. Had the stock been sold at the market-clearing price, as in a standard Dutch auction, investors would have received all of the stock they were willing to purchase. However, this had its drawbacks for Google; the company may not have awarded stock to all potentially advantageous investors and set itself up for an increase in price. This frustrated investors, since they were not getting all of the stock they desired, and the market experienced a dramatic increase in price after the first day. This would have been avoided if Google had chosen to sell the stock at the market-clearing prices.
In class, we have not performed any case studies of market-clearing prices. This example of Google’s stock market pricing illustrates the importance of market-clearing prices for both consumers and sellers. The consumers, or the investors in this case, were negatively affected by the auction due to Google’s decision to put the company in a more strategically advantageous position. By including key investors soon after Google appeared on the market, it could establish strong relations with these investors and encourage them to purchase more stock. Additionally, the low price significantly increased the chance for the price of stock to rise over the next few days, which would encourage investors to purchase more stock. Strategically for Google, selling stock below the market-clearing price would yield long-term rewards, and this is not something we had been able to consider in lecture that applies to real-world markets.
Article: Some Investors Feel Shorted by Google
http://articles.latimes.com/2004/aug/24/business/fi-google24