Two Dimensional Auctions for Efficient Franchising of Public Monopolies

J. Bushnell and S. Oren

EECS Department
University of California, Berkeley
Technical Report No. UCB/ERL M93/41
April 1993

http://www2.eecs.berkeley.edu/Pubs/TechRpts/1993/ERL-93-41.pdf

We consider the problem of a regulator who wishes to award an exclusive supply contract to one of several firms whose technologies are characterized by general, privately known, cost functions. The regulator's objective is to maximize social welfare. We investigate a bidding scheme in which the potential suppliers bid a fixed and a variable cost of supply and their payoffs are endogenously determined by a downward-slopping demand function. The winning bid is determined by a scoring rule combining both prices. We show that the only scoring rule which can lead to socially efficient outcomes is some monotone transformation of the consumer surplus. We further show that when such a scoring rule is used in a first price auction it is a dominant strategies which result in socially optimal selection and production. The second price auction described is in fact a two dimensional revelation mechanism.

BibTeX citation:

@techreport{Bushnell:M93/41,
    Author = {Bushnell, J. and Oren, S.},
    Title = {Two Dimensional Auctions for Efficient Franchising of Public Monopolies},
    Institution = {EECS Department, University of California, Berkeley},
    Year = {1993},
    Month = {Apr},
    URL = {http://www2.eecs.berkeley.edu/Pubs/TechRpts/1993/2353.html},
    Number = {UCB/ERL M93/41},
    Abstract = {We consider the problem of a regulator who wishes to award an exclusive supply contract to one of several firms whose technologies are characterized by general, privately known, cost functions. The regulator's objective is to maximize social welfare. We investigate a bidding scheme in which the potential suppliers bid a fixed and a variable cost of supply and their payoffs are endogenously determined by a downward-slopping demand function. The winning bid is determined by a scoring rule combining both prices. We show that the only scoring rule which can lead to socially efficient outcomes is some monotone transformation of the consumer surplus.  We further show that when such a scoring rule is used in a first price auction it is a dominant strategies which result in socially optimal selection and production. The second price auction described is in fact a two dimensional revelation mechanism.}
}

EndNote citation:

%0 Report
%A Bushnell, J.
%A Oren, S.
%T Two Dimensional Auctions for Efficient Franchising of Public Monopolies
%I EECS Department, University of California, Berkeley
%D 1993
%@ UCB/ERL M93/41
%U http://www2.eecs.berkeley.edu/Pubs/TechRpts/1993/2353.html
%F Bushnell:M93/41