How to Auction a Bottleneck Monopoly When Underhand Vertical Agreements are Possible

Eduardo Engel, Ronald Fischer and Alexander Galetovic

Journal of Industrial Economics, 2004, vol. 52, issue 3, 427-455

Abstract: A seaport is awarded in a Demsetz auction to the operator bidding the lowest cargo‐handling fee. The competitive auction is irrelevant if the port operator integrates into shipping and sabotages competitors, thus providing a motive for a ban on vertical integration. The paper shows that such a ban increases welfare even when underhand agreements with shippers are possible. For this result to attain, the auction must be combined with a sufficiently high floor on the cargo‐handling fee that operators can bid in the auction. With no floor, a Demsetz auction is worse than an unregulated bottleneck monopoly.

Date: 2004
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