Concession Bidding Rules and Investment Time Flexibility

We study the competition to operate an infrastructure service bydeveloping a model where firms must report a two-dimensional sealedbid: the price to consumers and the concession fee paid to the government. Two bidding rules are considered in this paper. One ruleconsists of awarding the concession to the firm that reports the lowestprice. 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 imposesthe obligation to immediately undertake the investment required toroll-out the service. The latter allows the concessionaire to optimallydecide the investment timing. The focus is on the effect of biddingrules and managerial flexibility on expected social welfare. We findthat the two bidding rules provide the same outcome only when thecontract does not restrict the autonomy of the franchisee, and we identify the conditions under which time flexibility can provide a highersocial value.