Serial private infrastructures

Abstract

This paper investigates private supply of two congestible infrastructures that are serial, where the consumer has to use both in order to consume. Four market structures are analysed: a monopoly and 3 duopolies that differ in how firms interact. It is well known that private supply leads too high usage fees, and that a serial duopoly leads to even higher fees than a monopoly, as firms are monopolists on their sections. But, as this paper finds, a duopoly can also lead to a different capacity rule than the first-best one, and this distortion differs from with two parallel facilities. Finally, four auction formats for the right to build and operate facilities are investigated. With a bid auction, the competition is on how much to pay the government. This auction leads to the same outcome as no auction. An auction on the facility’s capacity leads to an even lower welfare than no auction, as firms set overly large high capacities. Conversely, an auction on the generalised price or number of users leads to the first-best outcome, which they do when the facilities go to one or two winners and both with serial as with parallel facilities.