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How to Auction a Bottleneck Monopoly When Underhand Vertical Agreements are Possible

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  • Eduardo M. R. A. Engel
  • Ronald D. Fischer
  • Alexander Galetovic

Abstract

A seaport is awarded in a Demsetz auction to the operator bidding the lowest cargo‐handling fee. The competitive auction is irrelevant if the port operator integrates into shipping and sabotages competitors, thus providing a motive for a ban on vertical integration. The paper shows that such a ban increases welfare even when underhand agreements with shippers are possible. For this result to attain, the auction must be combined with a sufficiently high floor on the cargo‐handling fee that operators can bid in the auction. With no floor, a Demsetz auction is worse than an unregulated bottleneck monopoly.

Suggested Citation

  • Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2004. "How to Auction a Bottleneck Monopoly When Underhand Vertical Agreements are Possible," Journal of Industrial Economics, Wiley Blackwell, vol. 52(3), pages 427-455, September.
    • Handle: RePEc:bla:jindec:v:52:y:2004:i:3:p:427-455
    DOI: 10.1111/j.0022-1821.2004.00233.x
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    References listed on IDEAS

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    Cited by:

    1. Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 2005. "Highway franchising and real estate values," Journal of Urban Economics, Elsevier, vol. 57(3), pages 432-448, May.
    2. Agostini, Claudio & Saavedra, Eduardo H., 2013. "Chile: Port congestion and efficient rationing in cargo transfer operations," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    3. Bustos Alvaro E & Galetovic Alexander, 2009. "Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-52, September.
    4. Zhang, Jihua, 2016. "Quasi-landlord port financing in China: Features, practice and a contract theory analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 89(C), pages 73-88.
    5. Christophe Theys & Theo E. Notteboom & Athanasios A. Pallis & Peter W. De Langen, 2010. "The Economics Behind the Awarding of Terminals in Seaports: Towards a Research Agenda," Chapters, in: Kevin Cullinane (ed.), International Handbook of Maritime Business, chapter 12, Edward Elgar Publishing.

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