Designing Auctions for Concessions— Guessing the Right Value to Bid and the Winner’s Curse

Once a government has decided to award a concession by auction, it needs to decide what kind of auction to use—whether a first-price or second-price auction, whether sealed or open bids, and whether sequential or simultaneous bids for multiple items. For concessions the standard is a first-price sealed bid auction in which bidders submit sealed envelopes containing their offer and the highest offer determines the price. The bidding may occur in one or two stages. In two-stage bidding the technical parameters of the bids are made comparable in the first stage, and only the main offer on the core bid parameter is submitted in the second. The main offer may relate to a price, a level of subsidy, a payment for net worth, or any other appropriate parameter; the discussion in this Note focuses on price. In one-stage bidding the entire bid is submitted, the envelopes are opened, the bids are made public, and the highest bidder wins. But it may not immediately be obvious who has won, because bids must first be compared and evaluated on all relevant dimensions. These bidding approaches parallel those for civil works and equipment contracts.