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20 BIAIS AND FAUGERON-CROUZET
is rather inelastic: It takes a big price increase to increase the residual supply. This
large price impact makes it unattractive for each investor to attempt to increase
her purchases. Our theoretical model provides an alternative interpretation for the
thought-provoking empirical findings of Kandel et al. (1997) on the uniform price,
market clearing IPO mechanism used in Israel. In particular, Kandel et al. (1997)
find that (i) there is significant underpricing, and (ii) the (absolute value of the)
slope of the demand schedules is low, i.e., there is a flat, around the IPO price.
This is consistent with our theoretical result that the slope of the demand curve σ
must be low in the tacit-collusion Bayes-Nash equilibrium.
Because of the strategic complementarities between the actions of the bidders
in this auction, there exist multiple equilibria, some of which do not involve tacit
collusion. Yet, it is likely that the bidders will focus on the tacit collusion Nash
equilibrium presented in the proposition, since it is the most advantageous for
them.
To cope with tacit collusion within this mechanism while satisfying the individual
rationality condition of the informed investor with a bad signal, it is best for
the seller to set p ¯ to E(v | b).
To conclude this subsection, note that although underpricing is less severe in this
auction than in the fixed price offer, it is still quite significant, due the possibility
of tacit collusion it offers to the bidders.
3.3. The Mise en Vente
The Mise en Vente is an auction-like IPO procedure commonly used in France.
It operates as follows. Five days prior to the IPO the quantity offered and the
reservation price are set jointly by the bank, the broker, and the firm. On the
day of the IPO, investors submit limit orders to their brokers. The latter transmit
these orders to the stock exchange. The total demand function is computed
and graphically plotted by the auctioneer, who is a Bourse official. As a function
of this demand, the auctioneer sets the IPO price. As in the Book Building
method, there is no formal explicit algorithm mapping demand into prices. But
price adjustment in the Mise en Vente exhibits strong empirical regularities, as
shown in the next section. Eligible orders, above the IPO price, obtain prorata
execution.
To illustrate this description, consider the Mise en Vente of Partouche. On March
29, 1995, 500,000 shares were offered. The reservation price was 185. The total
demand, expressed at all prices, amounted to 8.4 million shares, i.e., 16.29 times
the supply. Figure 1 plots the demand expressed at each price. The IPO price was
set to 200, which corresponds to a percentage price adjustment of 8.1%. (Note
that the price at which supply would have been equal to demand was 220, i.e.,
the IPO price was deliberately set below market clearing). Eligible orders, placed
above 200, obtained prorata execution. The first secondary market price, set after a
tâtonnement process which lasted two days, was equal to 215, which corresponds
to 7.5% underpricing.