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

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.