Auctioning Monopoly Franchises: Award Criteria and Rollout Obligations. Journal of Public Economic Theory, Volume 15(1), pp. 53-75.
We study the competition to acquire the exclusive right to operate an utility service, by comparing two specifications for the financial proposals—the fee that the concessionaire will pay to the government and the price that the concessionaire will charge to its customers—and two alternative contractual arrangements, a concession which incorporates the obligation for the franchisee to operate the service immediately after winning the auction, and a contract which simply assigns the right to supply the market. We show that relieving the concessionaire from rollout obligations may either increase or reduce the government’s expected payoff depending on the bidding rule used to allocate the contract. As long as the government is indifferent between maximizing the fiscal revenue and maximizing the consumer surplus, concessioning without imposing rollout time limits and awarding the contract to the bidder offering the highest fee appears to be the best policy option.