Competition for the market may be desirable when competition in the market is infeasible or impractical. In such cases, the right to be the monopoly provider of the service² could be auctioned off through an efficient auction. An efficient auction is one in which (1) the most efficient firm wins the auction, and (2) the winning operator gives up most of its monopoly profits. An efficient auction achieves cost efficiency because the most efficient firm is the firm that can afford to pay the highest price for the right to be the monopoly. In paying this high price, the successful bidder gives up at least some portion of its monopoly profits, which can be distributed to customers. In general, monopoly profits are profits above the operator’s cost of equity³ that result from the operator having market power. Post-auction regulation may still be necessary if prices need to adjust to unanticipated events, but periodic re-bidding may substitute for typical price regulation in some situations.

FOOTNOTES

1. Chapter II Section C covers competition for the market. Back to Content
2. Chapter II Section A examines monopoly market structure. Back to Content
3. Cost of capital is reviewed in the subsection on Financial Analysis in this Overview and in Section G of Chapter III on Financial Analysis. The appropriate measure for the cost of capital is the weighted average cost of capital (WACC). Back to Content