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Auction theory, sequential local service privatization, and the effects of geographical scale economies on effective competition

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  • Antonio Miralles

    (Universitat de Barcelona)

Abstract

A sequential weakly efficient two-auction game with entry costs, interdependence between objects, two potential bidders and IPV assumption is presented here in order to give some theoretical predictions on the effects of geographical scale economies on local service privatization performance. It is shown that the first object seller takes profit of this interdependence. The interdependence externality rises effective competition for the first object, expressed as the probability of having more than one final bidder. Besides, if there is more than one final bidder in the first auction, seller extracts the entire bidders expected future surplus differential between having won the first auction and having lost. Consequences for second object seller are less clear, reflecting the contradictory nature of the two main effects of object interdependence. On the one hand, first auction winner becomes stronger, so that expected payments rise in a competitive environment. On the other hand, first auction loser becomes relatively weaker, hence (probably) reducing effective competition for the second object. Additionally, some contributions to static auction theory with entry cost and asymmetric bidders are presented in the appendix.

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Bibliographic Info

Paper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 132.

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Length: 34 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bar:bedcje:2005132

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Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.
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  1. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  2. Florencio Lopez-deSilanes & Andrei Shleifer & Rober Vishny, 1995. "Privatization in the United States," Harvard Institute of Economic Research Working Papers 1723, Harvard - Institute of Economic Research.
  3. Engelbrecht-Wiggans Richard, 1993. "Optimal Auctions Revisited," Games and Economic Behavior, Elsevier, vol. 5(2), pages 227-239, April.
  4. Stegeman, Mark, 1996. "Participation Costs and Efficient Auctions," Journal of Economic Theory, Elsevier, vol. 71(1), pages 228-259, October.
  5. Campbell, Colin M., 1998. "Coordination in Auctions with Entry," Journal of Economic Theory, Elsevier, vol. 82(2), pages 425-450, October.
  6. Gandal, Neil, 1997. "Sequential Auctions of Interdependent Objects: Israeli Cable Television Licenses," Journal of Industrial Economics, Wiley Blackwell, vol. 45(3), pages 227-44, September.
  7. Svetlana Pevnitskaya, 2003. "Endogenous Entry in First-Price Private Value Auctions: the Self-Selection Effect," Working Papers 03-03, Ohio State University, Department of Economics.
  8. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June.
  9. Armstrong, Mark, 2000. "Optimal Multi-object Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 455-81, July.
  10. McAfee, R. Preston & McMillan, John, 1987. "Auctions with entry," Economics Letters, Elsevier, vol. 23(4), pages 343-347.
  11. Milgrom, Paul, 1989. "Auctions and Bidding: A Primer," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 3-22, Summer.
  12. Kaplan, Todd & Sela, Aner, 2003. "Auctions with Private Entry Costs," CEPR Discussion Papers 4080, C.E.P.R. Discussion Papers.
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Cited by:
  1. Germa Bel & Anton Costas, 2006. "Do Public Sector Reforms Get Rusty? Local Privatization in Spain," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 9(1), pages 1-24.

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