Competition for the Market

General Concepts and Efficiency Impacts

Core References

Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 20.
Baldwin, Robert, and Martin Cave

Examines both commercial and government franchising. Discusses methods of allocating franchises, such as auctions, and problems with franchises. Problems include specifying the franchised service, ensuring efficient competition for the market, enforcement, and terminating contracts.

Franchising and Privatization
Note no. 40 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1995.
Dnes, Antony W.

Explains that franchise bidding is one way of having competition for the market when the market exhibits natural monopoly characteristics. Holds that the scheme can provide low prices for customers if the bid is for retail prices that will be charged.

Granting and Renegotiating Infrastructure Concessions: Doing It Right
Washington, D.C.: The World Bank Group, 2004, Chapters 2 and 7, Chapters 1-2.
Guasch, J. Luis

Provides an overview of concessions, including how they work, benefits, drawbacks, and experiences.

Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapters 8-9.
Guasch, J. Luis, and Pablo Spiller

Examines franchising and concessions. Examines cases in Argentina, Mexico, and Chile. Describes how to design concession arrangements.

Concessions – The Way to Privatize Infrastructure Sector Monopolies
Note no. 59 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1995.
Guislain, Pierre, and Michel Kerf

States that concession-type arrangements can be used for privatizing sectors with monopoly characteristics. Under this approach, the government grants the private sector the right to provide the utility service, but retains some control through a concession contract or license. The continuum of private participation options ranges from short-term supply and service contracts to concessions to full privatization.

Sectoral References

TRANSPORTATION

Regulatory Reform, Competition, and Innovation – A Case Study of the Mexican Road Freight Industry Policy
Research Working Paper number 2318, World Bank, Washington, D.C., 2000.
Dutz, Mark, Aydin Hayri, and Pablo Ibarra

Case study of Mexico of how innovations in road freight services affect selected downstream users of those services after regulatory reform.

Toolkit on Public-Private Partnerships in Highways
Public-Private Infrastructure Advisory Facility, World Bank.
Groupe Egis and Courdert Brothers

Provides low- and middle- income countries guidance in the design and implementation of Public-Private Partnerships in the highway sector. Covers all types of road projects and both with and without private funding.

Urban Bus Toolkit: Tools and Options for Reforming Urban Bus Systems
Public-Private Infrastructure Advisory Facility, World Bank.
CPCS Transcom

Provides guidance on evaluating existing and alternative urban bus systems in developing and transitional countries. Offers practical advice to enact fundamental system reforms.

WATER

Water Sector Contracts in Mexico City, Mexico
in Thirsting for Efficiency: The Economics and Politics of Urban Water System Reform, Washington, D.C.: The World Bank, 2002, pp. 139-187.
Haggarty, Luke, Penelope Brook, and Ana Maria Zuluaga

Describes water service contracts in Mexico. Illustrates the use of multiple operators to provide competitive pressure. Considers the motivations for the water sector reforms, the policy decisions, and policy changes.

Improving Water Services Through Competition
Note no. 164 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1998.
Webb, M., and Ehrhardt, D.

States that many major water sector reforms in recent years have used competition for the market as an efficient way of introducing private sector participation, and the approach has delivered benefits to consumers. Holds that competition forces the bidders to reveal the minimum cost of providing water and sanitation, allowing efficiency gains to be realized and passed on to consumers. Competition for the market can be combined with other forms of competition. Requiring the concessionaire to contract out many services can keep up the pressure for efficiency during long-term contracts. And comparative competition between the concessionaire and other utilities can boost performance.

Other References

Privatization: An Economic Analysis
Cambridge, MA: MIT Press, 1988, Chapter 3.
Vickers, John, and George Yarrow

Describes the effects of competition.

Key Words

Competition for the market, Monopoly, Franchise

 

Basic Auction Theory

Core References

Auction Theory: A Guide to the Literature
in The Economic Theory of Auctions, vol. 1. Cheltenham, U.K.: Elgar, 2000, pp. 3-62.
Klemperer, P.

Surveys in a non-technical way the main topics related to auction theory and the development of its literature in the last decades. Introduces the basic analysis of optimal auctions, the revenue equivalence theorem, and marginal revenues. Covers more detailed topics with a specific attention devoted to those related to those related to competition-policy. Provides some technical details through some simple worked examples.

What Really Matters in Auction Design
Journal of Economic Perspectives 16(1): 2002, pp. 169-89.
Klemperer, P.

Gives examples where auction design failed to guarantee the absence of anti-competitive behavior, mainly, collusion, predation and entry deterrence. Highlights the drawbacks of the most popular auction models and proposes some solutions. Emphasizes the need for stronger antitrust policy in auction markets.

Auctions Too Good To Be True
2011.
Decarolis, Francesco and Klein, Michael

Auctions are supposed to be the most effective means of securing the best deals for infrastructure concessions. Yet it is well known that bidders sometimes behave strategically by, for example, low-balling bids in anticipation of contract renegotiation. Various solutions to this problem have been tried in several countries, including Colombia, Italy, China, Chile, Japan, Peru and Taiwan, but it turns out that these new auction designs give rise to new forms of strategic bidding behavior, which create even bigger problems. Using standard procedures like first price sealed bid auctions remains best practice as long as well-established disciplines for pre-qualification and control of post-bid behavior are maintained.

Sectoral References

ELECTRICITY

Auctions and Trading in Energy Markets — An Economic Analysis
Working Papers in Economics, Department of Applied Economics, University of Cambridge, U.K., 2002.
Newbery, D., and T. McDaniel

Shows how auction design is an important issue in the operation and planning in British energy markets. Discusses the adjustments in the trading arrangements in the electricity industry, and presents some of their results to date. Looks at the merit of auctions in replacing regulation to manage natural monopolies in energy markets.

GAS

Auctions to Gas Transmission Access: The British Experience
Auctions and Beauty Contests: A Policy Prospective, SEOR-Erasmus Competition and Regulation Institute, Rotterdam, 2002.
McDaniel, T., and K. Neuhoff

Investigates whether auctioning access rights is an adequate way of managing transmission constraints in natural gas networks. Describes the evolution of the liberalization process of the gas industry in the UK and argues that auctioning entry rights improves allocative efficiency provided that competitive production and supply markets exist. Expresses some reserve about the adequacy of auctioning mechanisms when deciding about transmission capacity expansion.

TELECOMMUNICATIONS

Analyzing the Airwaves Auction
Journal of Economic Perspectives 10(1): 1996, 159-75.
McAfee, R., and J. McMillan

Explains the details of the design of the U.S. Federal Communications Commission spectrum license auction in light of the economic theory of auctions. Describes how auction theory helped address policy questions such as the type of auction to be run, the timetable and the bidding strategies, which would best guarantee efficiency in its final outcome. Shows how this auction has encouraged further theoretical advances.

TRANSPORTATION

Multidimensionality and Renegotiation: Evidence from Transport-Sector Public-Private-Partnership Transactions in Latin America Policy
Research Working Paper number 4665, World Bank, Washington, D.C., 2008.
Estache, Antonio, Jose-Luis Guasch, Atsushi Iimi, and Lourdes Trujillo

Using auction data from road and railway concessions in Latin America, the analysis shows that the renegotiation risk in infrastructure concessions increases when multidimensional auctions are used. Good governance, particularly anti-corruption policies, can mitigate the renegotiation problem.

Key Words

Auction, Bidding, Value

 

Practical Applications of Competition for the Market

Core References

Granting and Renegotiating Infrastructure Concessions: Doing It Right
Washington, D.C.: The World Bank Group, 2004, Chapters 2 and 7, Chapters 2 and 7.
Guasch, J. Luis

Provides an overview of concessions, including how they work, benefits, and drawbacks. Provides guidelines for optimal concession design, including award processes, award criteria, renegotiation clauses, concession length, commitments, tariffs and other financial issues, and dispute resolution.

Bidding for Concessions – The Impact of Contract Design
Note no. 158 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Klein, Michael

Explains that concession contracts should set out the rights and performance obligations of concessionaires and the risks and incentives under which they operate, including pricing arrangements. The clarity with which these terms can be defined affects the likelihood of renegotiation after contract award. The design of incentives and risk allocation will affect first the intensity of competition and then the sustainability of the original contract.

Designing Auctions for Concessions: Guessing the Right Value to Bid and the Winner’s Curse
Note no.160 in Public Policy for the Private Sector, Washington, D.C.: World Bank Group, 1998.
Klein, Michael

Explains that the choice of auction method is affected by arguments about the political sustainability of the outcome; firms’ bidding strategies, including the risk of the winner’s curse; and the risk of collusion among bidders. All these ingredients combine to determine whether an auction design yields value; how that value is distributed among bidders, consumers, and the government; and whether the deal will last.

Competition in Network Industries – Where and How to Introduce It
Note no. 104 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Klein, Michael, and Philip Gray

Explains that regulation may be necessary with franchising to allow prices to adjust in response to events, though rebidding the franchise periodically allows the regulator a way around typical price regulation. If there are significant fixed costs involved, then the necessary transfer of assets will involve complex asset valuation exercises. Term limits on the franchise and some rebidding can ensure regular challenges to the incumbent.

Back to the Future: The Potential in Infrastructure Privatization
Note no. 30 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1994.
Klein, Michael, and Neil Roger

States that because monopolies can extract excessive profits, a sustainable ownership arrangement requires a rent-sharing system that protects consumers, provides owners with incentives to operate the network efficiently, and reduces the temptation for governments to exploit monopoly rents for political advantage. Holds that monopolies can be subjected to competition through repeated franchise bidding, under which monopoly service franchises are auctioned off from time to time and awarded to the firm offering acceptable service on the best terms. Franchise bidding can be effective for infrastructure services that do not require investments tied to a particular service area—for example, many forms of transport services or solid waste collection.

The Case-by-Case Approach to Privatization: Techniques and Examples – Privatization Toolkits.
World Bank Technical Paper No. 403, Washington, D.C., 1998.
Welch, Dick, and Olivier Fremond

In the context of sale of a state-owned enterprise, discusses how to prepare for and organize an auction.

Sectoral References

ELECTRICITY

Auctioning Subsidies for Rural Electrification in Chile
Note no. 214 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 2000.
Jadresic, Alejandro

Describes how Chilean regional governments allocate subsidy funds to private companies to help cover investment costs. These funds are allocated to proposed projects on the basis of a project cost-benefit analysis, the amount of investment covered by the companies, and the social impact of the project. Rural communities lacking electricity supply typically propose the projects along with distributors interested in providing the service. Describes sources of competition.

GAS

Auctions to Gas Transmission Access: The British Experience
Auctions and Beauty Contests: A Policy Prospective, SEOR-Erasmus Competition and Regulation Institute, Rotterdam, 2002.
McDaniel, T., and K. Neuhoff

Describes how and under what conditions auctioning access rights in gas can increase efficiency relative to negotiation and grandfathering. Uses British gas network as a case study.

TELECOMMUNICATIONS

On the Design and Implementation of the GSM Auction in Nigeria – the World’s First Ascending Clock Spectrum Auction
Telecommunications Policy, 27(5-6): 2003, pp. 383-405.
Doyle, Chris, and Paul McShane

Describes the Nigerian GSM auction. Considers auction design, revisions to the design, and management of the auction.

Extending Telecommunications Service to Rural Areas—The Chilean Experience: Awarding subsidies through competitive bidding
Note no. 105 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, February 1997.
Wellenius, Björn

Describes how Chile auctions subsidies for rural telecommunications. Considers overall design of the process and the results.

Introducing Telecommunications Competition through a Wireless License: Lessons from Morocco
Note no. 199 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, November 1999.
Wellenius, Björn, and Carlo Maria Rossotto

Describes how Morocco auctioned a GSM license. Describes the process transparency and how it affected results.

TRANSPORTATION

Road Infrastructure Concession Practice in Europe
French Highway Directorate, Paris, 2001.
Bousquet, Franck and Alain Fayard

Reviews road infrastructure concessions in Europe with special emphasis on the role of public authorities as overseers of the concessions.

Federal Railways Restructuring and Privatization Project
Implementation Completion and Results Report, number 25241, World Bank, Washington, D.C., 2003.
World Bank

Reports results of restructuring Brazil’s railway system. An important lesson is that addressing the redundancy issue upfront, and initiating a well-designed staff retrenchment program can be an effective instrument to minimize the impacts of restructuring, and to reduce opposition to such project.

WATER

Expanding Water and Sanitation Services to Low-Income Households
Note no. 178 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Komives, Kristin, and Penelope J. Brook Cowen

Describes the La Paz and El Alto concession. Instead of asking bidders to specify the tariff they would require to meet pre-specified investment and service obligations as did earlier concession awards in the region, bidders for the this concession identified the number of water connections they would make in exchange for a pre-specified tariff.

Improving Water Services through Competition
Note no. 164 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, December 1998.
Webb, M., and Ehrhardt, D.

States that competition for the market as an efficient way of introducing private sector participation and the approach has delivered benefits to consumers. Describes special issues for small towns where the costs of preparing a tender and of preparing bids are disproportionate to their size. Describes how several small towns join together to overcome this problem. Competition for the market can be combined with other forms of competition. Examines requiring the concessionaire to contract out services and using comparative competition between the concessionaire and other utilities.

Key Words

Competition, Franchising, Bidding, Natural Monopoly, Contract

 

Termination, Renewal, Rebidding and Renegotiation

Core References

Post-Privatization Renegotiation and Disputes in Chile
IFM-116, Washington, D.C.: Inter-American Development Bank, September 1999.
Basanes, Federico C., Eduardo Saavedra, and Raimundo Soto

Describes Chile’s experience, which illustrates the importance of the design of the post-privatization market, the regulatory framework, and the institutional capabilities the regulator. Explains that disputes most often occur where regulation is incomplete, information asymmetry is high and regulatory institutions are less able to monitor the private operators. Conflict stemmed mostly from: (a) the existence of vertical integration, (b) the lack of definition of certain areas in regulation; and (c) the institutional weaknesses of regulatory bodies. Describes how a large vertically integrated conglomerate used its market power in the regulated market to reduce competition and raise its profits in the competitive segment.

Regulating Infrastructure: Monopoly, Contracts, and Discretion
Cambridge, MA: Harvard University Press, 2003, Chapter 5.
Gómez-Ibáñez, José

Discusses the problems of having incomplete contracts. Uses case of railroads in Argentina.

Granting and Renegotiating Infrastructure Concessions: Doing It Right
Washington, D.C.: The World Bank Group, 2004, Chapters 2 and 7, Chapters 3-6.
Guasch, J. Luis

Describes renegotiation problems, why they arise, and how to engage in renegotiation.

Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapter 8.
Guasch, J. Luis, and Pablo Spiller

Examines franchising and concessions. Examines cases in Argentina, Mexico, and Chile.

Rebidding for Concessions
Note no. 161 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Klein, Michael

Explains that the longer a concession lasts, the less effect the initial rounds of bidding will have on the concession over its full life. Periodic renegotiations or price reviews will be more influential. Holds that the market power of concessionaires can be limited by periodically re-auctioning a concession if contracts can be well written and rebidding is practical.

Rebidding for concession-type arrangements is sometimes called a Chadwick-Demsetz auction.

Sectoral References

WATER

Reforming Water Supply in Abidjan, Côte D’Ivoire: A Mild Reform in a Turbulent Environment
in Thirsting for Efficiency: The Economics and Politics of Urban Water System Reform, Washington, D.C.: The World Bank, 2002, pp. 233-272.
Ménard, Claude, and George R.G. Clarke

Examines the case of Abidjan, Côte D’Ivoire. Focuses on the motivations for the reforms, how the reforms affected performance and why, and why the system performs well.

Key Words

Competition, Franchising, Bidding, Negotiation, Natural Monopoly, Contract

 

Regulatory Oversight of Competitive Procurement

Core References

Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999, Chapter 9.
Guasch, J. Luis, and Pablo Spiller

Examines concession arrangements. Considers issues of sole source and competitive procurement, principal-agent problems within the government procurement process, types of procurements, and collusion.

Designing Auctions for Concessions: Guessing the Right Value to Bid and the Winner’s Curse
Note no.160 in Public Policy for the Private Sector, Washington, D.C.: World Bank Group, 1998.
Klein, Michael

Examines reasons why regulators are involved in auctions, namely issues of technical expertise, consistency between contact award and contract enforcement, knowledge of bidders, independence, and information gathering, especially for future price reviews.

Sectoral References

TELECOMMUNICATIONS

On the Design and Implementation of the GSM Auction in Nigeria – the World’s First Ascending Clock Spectrum Auction
Telecommunications Policy, 27(5-6): 2003, pp. 383-405.
Doyle, Chris, and Paul McShane

Describes the Nigerian GSM auction. Considers auction design, revisions to the design, and management of the auction.

Key Words

Competition, Franchising, Bidding, Negotiation, Natural Monopoly, Contract, Transparency

 

Negotiated Bids

Core References

Infrastructure Concessions – To Auction or Not to Auction?
Note no. 159 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Klein, Michael

Examines whether the authority letting a concession should negotiate a contract for an exclusive private infrastructure deal or engage in an auction. Negotiations with a single supplier are faster than an auction, but having even a quick auction improves the authority’s negotiating position.

Designing Auctions for Concessions: Guessing the Right Value to Bid and the Winner’s Curse
Note no.160 in Public Policy for the Private Sector, Washington, D.C.: World Bank Group, 1998.
Klein, Michael

“The private sector often uses some form of competitive negotiation, which in principle operates like an open auction. But for government procurement or procurement by regulated monopolies it is generally desirable to allow less discretion than is involved in competitive negotiation.” Examines the merits and problems of open and sealed bids.

The Case-by-Case Approach to Privatization: Techniques and Examples – Privatization Toolkits
World Bank Technical Paper No. 403, Washington, D.C., 1998.
Welch, Dick, and Olivier Fremond

Provides steps in auctions and explains that negotiated sales are necessary when there is a single bidder or when one bidder is clearly superior to all other bidders.

Concessions of busways to the private sector : the Sao Paulo Metropolitan Region experience
Produced by: Policy Research Working Papers, World Bank , 1995.
Rebelo, Jorge M., and Pedro P. Benvenuto

Demonstrates that private companies are ready to go deeper into public transport than they have gone before. Reviews tender documents for ten bus corridors (one state and nine municipal), defining rules for private concerns to bid for implementing and operating trunkline services.

Key Words

Bidding, Negotiation

 

Case Studies

Regulatory Reforms in India: Effectiveness, Efficiency, and Impacts
The Energy and Resources Institute, New Delhi, India, 2003.
Garg, A., M. Kabra, and R. Kacker

The Nigerian Auction of the 2G Spectrum (A)
University of Florida, Department of Economics, PURC Case Study, 2007.
Nahlik, Andrew, and Mark A. Jamison

Privatization of Electricity Distribution: The Orissa Experience
Tata Energy Research Institute, New Delhi, India, 2003. Purchase.
Ramanathan, K. and S. Hasan