Abstract

In many circumstances, a principal, who wants prices to be as low as possible, must contract with agents who would like to charge the monopoly price. This paper compares a Demsetz auction, which awards an exclusive contract to the agent bidding the lowest price (competition for the field) with having two agents provide the good under (imperfectly) competitive conditions (competition in the field). We obtain a simple sufficient condition showing unambiguously which option is best. The condition depends only on the shapes of the surplus function of the principal and the profit function of agents, and is independent of the particular duopoly game played ex post. We apply this condition to three canonical examples -- procurement, royalty contracts and dealerships -- and find that whenever marginal revenue for the final good is decreasing in the quantity sold, a Demsetz auction is best. Moreover, a planner who wants to maximize social surplus also prefers a Demsetz auction.

Abstract

This discussion paper resulted in a publication in 'Transportation Research Part B: Methodological' , 2013, 53, 31-44. We analyse the behaviour of market participants in a multi-modal commuter network where roads are not priced, but public transport has a usage fee, which is set while taking the effects on the roads into account. In particular, we analyse the difference between markets with a monopolistic public transport operator, which operates all public transport links, and markets in which separate operators own each public transport link. To do so, we consider a simple transport network consisting of two serial segments and two parallel congestible modes of transport. We obtain a reduced form of the public transport operator's optimal fare setting problem and show that, even if the total travel demand is inelastic, serial Bertrand-Nash competition on the public transport links leads to different fares than a serial monopoly; a result not observed in a static model. This results from the fact that trip timing decisions, and therefore the generalized prices of all commuters, are influenced by all fares in the network. We then use numerical simulations to show that, contrary to the results obtained in classic studies on vertical competition, monopolistic fares are not always higher than duopolistic fares; the opposite can also occur. We also explore how different parameters influence the price differential, and how this affects welfare.