DESIGNING A PRIVATE INDUSTRY - GOVERNMENT AUCTIONS WITH ENDOGENOUS MARKET-STRUCTURE

This paper considers government mechanisms for auctioning production r ights in which both the winners and the market structure, duopoly (dua l-sourcing), monopoly (sole-sourcing), or government-owned production, are a function of the bids. In designing the optimal mechanism, the g overnment considers the tradeoffs among consumer surplus, producer sur plus, and revenue. Under incomplete information, duopoly is implemente d less frequently, and government production more frequently, than und er complete information. When bidders are symmetric, the optimal mecha nism can be implemented as a modified second-price auction. Applicatio ns to privatization, deregulation, and defense procurement are discuss ed.