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Design of Multidimensional Franchise Auctions by an Ignorant Principal

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The paper’s main aim is to identify under which conditions the criterion of prior-independent optimality is applicable in the design of multidimensional franchise auctions. We first establish an impossibility result for second-score auctions by showing that in single-crossing environments necessary and sufficient condition for score functions to be optimal in this sense is that bidders have equal variable cost functions. Then we show that the result is not confined to the second-score format but holds for any scoring auction under stochastic independence. Therefore, a regulator who has no information at all about firms’ costs cannot in such circumstances avail himself of prior-independent optimality as choice criterion. Conversely, if variable cost functions are equal across potential contractors, as is likely in certain public services markets, and the regulator knows it, it is possible for him to implement a prior-independent optimum by scoring bids according to the social welfare function under various auction formats, including first- and second-score auctions. This simple prescription however no longer applies if the regulator is ignorant about market demand too. In this case a fully rational choice of the score function is precluded, though it may be possible to make a reasonable one: a brief discussion of this point closes the paper.

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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Economics with number wp2008_13.rdf.

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Length: 27 pag
Date of creation: 2008
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Handle: RePEc:frz:wpaper:wp2008_13.rdf

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  1. Bushnell, James B & Oren, Shmuel S, 1994. "Bidder Cost Revelation in Electric Power Auctions," Journal of Regulatory Economics, Springer, vol. 6(1), pages 5-26, February.
  2. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  3. Dirk Bergemann & Stephen Morris, 2003. "Robust Mechanism Design," Cowles Foundation Discussion Papers 1421, Cowles Foundation for Research in Economics, Yale University.
  4. John Asker & Estelle Cantillon, 2008. "Properties of Scoring Auctions," ULB Institutional Repository 2013/172674, ULB -- Universite Libre de Bruxelles.
  5. Sandeep Baliga & Rakesh Vohra, 2010. "Market Research and Market Design," Levine's Working Paper Archive 506439000000000336, David K. Levine.
  6. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
  7. Bichler, Martin & Kalagnanam, Jayant, 2005. "Configurable offers and winner determination in multi-attribute auctions," European Journal of Operational Research, Elsevier, vol. 160(2), pages 380-394, January.
  8. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  9. Asker, John & Cantillon, Estelle, 2005. "Optimal Procurement When Both Price and Quality Matter," CEPR Discussion Papers 5276, C.E.P.R. Discussion Papers.
  10. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
  11. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 277-311, January.
  12. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
  13. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
  14. Müller, Rudolf & Perea, Andrés & Wolf, Sascha, 2007. "Combinatorial Scoring Auctions," Research Memorandum 020, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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