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Designing a market structure when firms compete for the right to serve the market

Author

Listed:
  • Michel Mougeot

    (CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE])

  • Florence Naegelen

    (CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE])

Abstract

In many industries, a regulator designs an auction to select ex‐ante the firms that compete ex‐post on the product market. This paper considers the optimal market structure when firms incur sunk costs before entering the market and when the government is not able to regulate firms in the market. We prove that a free entry equilibrium results in an excessive entry when the entry costs are private information. Then, we consider an auction mechanism selecting the firms allowed to serve the market and show that the optimal number of licences results in the socially optimal market structure. When all the potential candidates are actual bidders, the optimal number of firms in the market increases with the number of candidates and decreases with the social cost of public funds. When the market size is small, as the net profit in the market decreases with the number of selected firms, entry is endogenous. As increasing competition in the market reduces competition for the market, the optimal structure is more concentrated than in the previous case.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Michel Mougeot & Florence Naegelen, 2005. "Designing a market structure when firms compete for the right to serve the market," Post-Print hal-00448913, HAL.
    • Handle: RePEc:hal:journl:hal-00448913
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    Cited by:

    1. Gebhardt, Georg & Wambach, Achim, 2008. "Auctions to implement the efficient market structure," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 846-859, May.
    2. van den Berg, Vincent A.C. & Rouwendal, Jan, 2016. "Tender auctions with existing operators bidding," Economics of Transportation, Elsevier, vol. 6(C), pages 1-10.
    3. Ma, Mingcao & Weng, Jin & Yu, Larry, 2015. "Market size, scale economies, and tourism market structure: A case of historic water town tourism in China," Tourism Management, Elsevier, vol. 49(C), pages 119-137.

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