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ISRN Economics
Volume 2012 (2012), Article ID 703541, 15 pages
http://dx.doi.org/10.5402/2012/703541
Research Article

Rent Extraction through Alternative Forms of Competition in the Provision of Paternalistic Goods

1Faculty of Science and Technology, Free University of Bozen, Piazza Università 5, I-39100 Bozen/Bolzano, Italy
2Department of Economics and Management, University of Brescia, Via San Faustino 74b, 25121 Brescia, Italy

Received 22 November 2012; Accepted 10 December 2012

Academic Editors: B. Junquera, M. Ransom, W. R. Reed, and E. Silva

Copyright © 2012 Laura Levaggi and Rosella Levaggi. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We compare the properties in terms of rent extraction of spatial competition and monopoly franchises using Dutch first price auctions, two of the most widely used tools to regulate public service provision. In a framework where the regulator can imperfectly observe costs, but the latter are not necessarily private information to each competitor, spatial competition is more effective in extracting rent if providers are very different in their productivity and if they can observe the costs of their competitors. When they are quite similar and have limited information on the competitors' characteristics, the use of a monopoly franchise through an auction mechanism should be preferred. In the latter environment, a multiple object auction allows more rent to be extracted from the provider.