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.
- Market Structure and Competition’s reference section on General Concepts and Efficiency Impacts covers competition for the market.
- Market Structure and Competition’s reference section entitled Monopoly and Market Power examines monopoly market structure.
- Cost of capital is reviewed in the subsection on Financial Analysis in this Overview and in Determination of Cost of Capital in Financial Analysis on Financial Analysis. The appropriate measure for the cost of capital is the weighted average cost of capital (WACC).