Awarding Monopoly Franchises

Abstract

The authors analyze how to award a monopoly franchise when the objective is to maximize expected consumers' surplus net of transfer payments to the producer. Potential producers initially possess independent private information about uncertain production costs. Only the chosen producer subsequently observes realized production costs. After awarding the franchise to the producer with the lowest expected costs, prices are optimally set above realized marginal cost. These ex post distortions foster more competitive bidding ex ante. The distortions for any bid-cost pair are invariant to the number of bidders, n, though expected distortions and profits decline with n. Copyright 1987 by American Economic Association.

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