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

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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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Document Type: Research Article

Affiliations: Department of Finance, University of Vienna, 1210 Vienna, Austria

Publication date: 2008-06-01

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