Auction theory, sequential local service privatization, and the effects of geographical scale economies on effective competition

Abstract

A sequential weakly efficient two-auction game with entry costs, interdependence between objects, two potential bidders and IPV assumption is presented here in order to give some theoretical predictions on the effects of geographical scale economies on local service privatization performance. It is shown that the first object seller takes profit of this interdependence. The interdependence externality rises effective competition for the first object, expressed as the probability of having more than one final bidder. Besides, if there is more than one final bidder in the first auction, seller extracts the entire bidders expected future surplus differential between having won the first auction and having lost. Consequences for second object seller are less clear, reflecting the contradictory nature of the two main effects of object interdependence. On the one hand, first auction winner becomes stronger, so that expected payments rise in a competitive environment. On the other hand, first auction loser becomes relatively weaker, hence (probably) reducing effective competition for the second object. Additionally, some contributions to static auction theory with entry cost and asymmetric bidders are presented in the appendix.local service, privatization