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Awarding monopoly franchises repeatedly: are second-best block-rate tariffs attainable without regulation?

Applied Economics , Volume 40 (12): 1519-1528 – Jun 1, 2008

Details

Publisher
Routledge
Copyright
© 2008 Informa plc
Subject
Macroeconomics
ISSN
0003-6846
D.O.I.
10.1080/00036840600829144
Publisher site
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Awarding monopoly franchises repeatedly: are second-best block-rate tariffs attainable without regulation?

Abstract

Under economies of scale, Demsetz's (1968) proposal of franchise bidding results, at best, in uniform prices approaching average cost. This article questions the accepted belief that the auctioneer always needs to know the market demand function, if the concept is modified so as to allow for bids consisting of block-rate tariffs in order to increase welfare. Given a setting of repeated auctions, the auctioneer can apply a sequential mechanism to evaluate bids, instead of evaluating them in each auction independently. We characterize the conditions under which a second-best block-rate tariff for given thresholds is approached in equilibrium.
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