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Concession Bidding Rules and Investment Time Flexibility

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  • Michele Moretto

    (University of Padova)

  • Cesare Dosi

    (University of Padova)

Abstract

We study the competition to operate an infrastructure service by developing a model where firms report a two-dimensional sealed bid: the price to consumers and the concession fee paid to the government. Two alternative bidding rules are considered in this paper. One rule consists of awarding the exclusive right of exercise to the firm that reports the lowest price. The other consists of granting the franchise to the bidder offering the highest fee. We compare the outcome of these rules with reference to two alternative concession arrangements. The former imposes the obligation to immediately undertake the investment required to roll-out the service. The latter allows the winning bidder to optimally decide the investment time. The focus is on the effect of bidding rules and managerial flexibility on expected social welfare. We find that the two bidding rules provide the same outcome only when the contract restricts the autonomy of the franchisee, and we identify the conditions under which time flexibility can provide a higher social value.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2007.3.

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Date of creation: Jan 2007
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Handle: RePEc:fem:femwpa:2007.3

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Related research

Keywords: Concessions; Auctions; Bidding Rules; Managerial Flexibility;

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References

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  1. Matthew O. Jackson & Jeroen M. Swinkels, 2005. "Existence of Equilibrium in Single and Double Private Value Auctions," Econometrica, Econometric Society, vol. 73(1), pages 93-139, 01.
  2. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 1-11, March.
  3. Simon, Leo K. & Zame, William R., 1987. "Discontinous Games and Endogenous Sharing Rules," Department of Economics, Working Paper Series qt8n46v2wv, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Jean-Jaques Laffont & Jean Tirole, 1985. "Auctioning Incentive Contracts," Working papers 403, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Michele Moretto & Chiara D.Alpaos & Cesare Dosi, 2005. "Concession Length and Investment Timing Flexibility," Working Papers 2005.32, Fondazione Eni Enrico Mattei.
  6. Eduardo M.R.A. Engel & Ronald D. Fischer & Alexander Galetovic, 1998. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," NBER Working Papers 6689, National Bureau of Economic Research, Inc.
  7. Paul Milgrom & Robert Weber, 1981. "Distributional Strategies for Games with Incomplete Information," Discussion Papers 428R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Klein, Michael, 1996. "Competition in network industries," Policy Research Working Paper Series 1591, The World Bank.
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Cited by:
  1. Chiara D'Alpaos & Michele Moretto & Paola Valbonesi, 2008. "Optimal penalty for investment delay in public procurement contracts," "Marco Fanno" Working Papers 0074, Dipartimento di Scienze Economiche "Marco Fanno".

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