The way the auction is setup is key, you only need to look at the spectrum auctions in the EU to see that some have performed very well (the UK from memory) while some have peformed very poorly. I would suggest that the evidence shows that a properly set up auction will generally be efficient (most efficient providers selected) and result in low supernormal profits for the winner.

There have been some spectacualr failures in sepctrum auctions, but when you look at how they were set up it is no surprise. My personal favorite was one where there were 4 liceneses and 4 bidders. Really not surprising that the auction wasn’t competitive…

Evidence? Huh? 😉

It is effective competition isn’t it – so in the absense of some type of collusion or cost differences for the firms I don’t see any reason for supernormal profits.

If the cost structures are different then we would still need to look at the combination of “fees” and “prices charged” in order to work out which firm has the competitive advantage. In such a case the method you are suggesting could, at best, get us to the same outcome as normal tendering methinks.

To be clear, In the case of a competitive tender, the firm with a cost advantage will slightly undercut other firms – so they will have supernormal profits but they will be restricted by effective competition. In the scenario you have suggested the tender will lead to the same result, just with transfers from parents to the school, from the school to the firm, and then from the firm to the parents.

The reason the NZCC is suggesting they run tenders for the exlusive contract is to help ensure that most of the surplus goes to the schools and that the most effcient producer is chosen. In the absence of a tender the firm with the exclusive contract would probably earn super normal profits.

But if there is a competitive tender for the manufacturing contract, won’t the competing firms talk up the fee they pay to the school until they reach their reservation level – normal profits.

The policy you are suggesting simply offers the contract to the manufacturer that offers lower prices and a lower fee, but then the parents pay the difference in the fee – which because of competition will be the same as the difference in prices!

I don’t know about a target level. My assumption was that more funding is better for schools. I guess this just shows how sensitive policies are to the assumptions we make. is it really true that clothing manufacturing is so competitive that they wouldn’t be making supernormal profits on $1000 school uniforms?!