On the Right-of-First-Refusal

37 Pages Posted: 24 Nov 2004

See all articles by Sushil Bikhchandani

Sushil Bikhchandani

University of California, Los Angeles - Anderson School of Management

Steven A. Lippman

University of California, Los Angeles (UCLA) - Policy Area

Reade Ryan

Amaranth LLC

Date Written: June 2002

Abstract

When the seller of an asset grants a right-of-first-refusal to a buyer, this special buyer has the opportunity to purchase the asset at the best price the seller can obtain from the other potential buyers. We show that the right-of-first-refusal is inefficient, and it benefits the special buyer at the expense of the seller and other buyers. In a private values model, the benefit the special buyer obtains via the right-of-first-refusal equals the cost to the seller. When buyers' valuations are correlated, the presence of a special buyer exacerbates the winner's curse on regular buyers. Consequently, the special buyer's expected gain from the right-of-first-refusal is often less than the expected loss to the seller. Thus, our analysis suggests that the seller should exercise considerable caution prior to deciding whether to grant this right to a buyer.

Keywords: Pricing, contracts, right-of-first-refusal, meet-the-competition clause

JEL Classification: D4, L11, L14

Suggested Citation

Bikhchandani, Sushil and Lippman, Steven A. and Ryan, Reade, On the Right-of-First-Refusal (June 2002). Available at SSRN: https://ssrn.com/abstract=621181 or http://dx.doi.org/10.2139/ssrn.621181

Sushil Bikhchandani (Contact Author)

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States
310-206-2686 (Phone)
310-825-1581 (Fax)

Steven A. Lippman

University of California, Los Angeles (UCLA) - Policy Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States

HOME PAGE: http://www.anderson.ucla.edu/acad_unit/policy/

Reade Ryan

Amaranth LLC ( email )

Greenwich, CT 06831
United States

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