Rent Extraction through Alternative Forms of Competition in the Provision of Paternalistic Goods

Abstract

We compare the properties in terms of rent extraction of spatial competition and monopoly franchises using Dutch first price auctions, two of the most widely used tools to regulate public service provision. In a framework where the regulator can imperfectly observe costs, but the latter are not necessarily private information to each competitor, spatial competition is more effective in extracting rent if providers are very different in their productivity and if they can observe the costs of their competitors. When they are quite similar and have limited information on the competitors' characteristics, the use of a monopoly franchise through an auction mechanism should be preferred. In the latter environment, a multiple object auction allows more rent to be extracted from the provider.