Concession Bidding Rules and Investment Time Flexibility

We study the competition to operate an infrastructure service by developing a model where firms must report a two-dimensional sealed bid: the price to consumers and the concession fee paid to the government. Two bidding rules are considered in this paper. One rule consists of awarding the concession to the firm that reports the lowest price. The other consists of granting the franchise to the bidder offering the highest fee. We compare the outcome of these rules with reference to two alternative concession arrangements. The former imposes the obligation to immediately undertake the investment required to roll-out the service. The latter allows the concessionaire to optimally decide the investment timing. The focus is on the effect of bidding rules and managerial flexibility on expected social welfare. We find that the two bidding rules provide the same outcome only when the contract does not restrict the autonomy of the franchisee, and we identify the conditions under which time flexibility can provide a higher social value.