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Franchise bidding with differences in demand

With a given static market demand and given static cost functions of all potential suppliers as well as sufficient competition, Demsetz' (1968) concept of franchise bidding leads to the selection of the welfare-maximizing supplier. However, with differences in demand among bidders, franchise bidding may lead to an inefficient choice of supplier. If the bidder with the lowest bid were barred from the auction, total surplus might rise, even under economies of scale. This result does not hold, if demand is noncrossing and if bidders' cost functions are identical and exhibit economies of scale.