Franchise bidding,regulation and investment costs

This paper analyzes the design of an optimal monopoly franchise policy when firms incur investment costs. We show how this policy depends on the timing of entry. When the investment cost is a fixed cost or a sunk cost paid after knowing the marginal cost parameter, the optimal policy consists of a Baron-Myerson type pricing rule and a lowest cost awarding rule. When the investment cost is a sunk cost paid before knowing the marginal cost parameter, auctioning the right to serve the market eliminates the need for an incentive regulation: the price is given by the complete information Ramsey formula and the subsidy is a Loeb-Magat type subsidy, while an entry fee yields first best entry.