Auctioning Monopoly Franchises: Award Criteria and Rollout Obligations

Authors


  • Cesare Dosi, Department of Economics, University of Padova, Via del Santo 33, 35100 Padova, Italy (cesare.dosi@unipd.it). Michele Moretto, Department of Economics, University of Padova, Centro Studi Levi Cases, Fondazione ENI Enrico Mattei, Italy (michele.moretto@unipd.it).

  • We thank, without implication, Gilberto Muraro, the associate editor and one anonymous referee for helpful suggestions and comments. Financial support by the Ministry of Education, University and Research (research grant PRIN 20089PYFHY_002) is gratefully acknowledged.

Abstract

We study the competition to acquire the exclusive right to operate an utility service, by comparing two specifications for the financial proposals—the fee that the concessionaire will pay to the government and the price that the concessionaire will charge to its customers—and two alternative contractual arrangements, a concession which incorporates the obligation for the franchisee to operate the service immediately after winning the auction, and a contract which simply assigns the right to supply the market. We show that relieving the concessionaire from rollout obligations may either increase or reduce the government’s expected payoff depending on the bidding rule used to allocate the contract. As long as the government is indifferent between maximizing the fiscal revenue and maximizing the consumer surplus, concessioning without imposing rollout time limits and awarding the contract to the bidder offering the highest fee appears to be the best policy option.

Ancillary