NOBEL PRIZE IN ECONOMICS 2009 - INITIATING "TRANSACTIONS-COST ECONOMICS"

WILLIAMSON, OLIVER.

Franchise Bidding for Natural Monopoly.

Worcester MA, The Heffernan Press, 1976. Royal8vo. In the original blue printed wrappers. In "The Bell Journal of Economics": Vol. 7, No. 1, Spring 1976. Entire volume offered. Very light wear to extremities otherwise a very fine and crisp copy (not ex-library). Pp. 73-104. [Entire volume: 353 pp.].

First printing of Williamson's seminal paper - one of the most influential in economics of regulation - in which he argued that in the presence of uncertainty about future demand or costconditions, the transactions costs of writing a complete contract, contingent on all future outcomes is prohibitively costly. The paper initiated together with Goldberg's paper published the same year the new field of "transactions-cost economics".
The paper was a contributing factor in Williamson being awarded the Nobel prize in Economics in 2009 for his " work in economic governance."

In the paper he states that: "A once-for-all auction for the provision of a natural monopoly service is, in practice, totally impractical. On the other hand, periodic re-tendering introduces its own problems. Most public utility industries require substantial sunk, long-lived investment - whether in distribution wires, rail lines, or telecommunications conduits. Where the life of this investment exceeds the life of the franchise, contractual arrangements must ensure continued investment and maintenance of the sunk asset. It may be difficult to verify the quality of the maintenance of the asset ex post. This is particularly the case where the quality dimension includes maintaining the human capital of the staff required to ensure the continued operation of the asset. In addition, the incumbent provider of the service is likely to have better quality information about the likely cost and demand characteristics
of the service, providing an informational advantage over potential rival bidders.
To illustrate these ideas, Williamson used a case study based on the experience of tendering cable television franchises in Oakland, California. He concludes: That franchise bidding for cable television has superior properties to regulation is not transparent - Not only is simple franchise bidding - beset with numerous transactional difficulties, but the institutional infrastructure that predictably develops to check dysfunctional or monopoloid outcomes has many of the earmarks of regulation.
Using modern language, Williamson highlights and emphasises the importance of transactions costs. Williamson introduced for the first time the notion that natural monopoly regulation can be viewed as a form of long-term contracting. That long-term contract incorporates mechanisms to allow for adjustment to changes in the environment: At the risk of over-simplification, regulation may be described contractually as a highly
incomplete form of long-term contracting in which (1) the regulatee is assured an overall fair rate of return, in exchange for which (2) adaptations to changing circumstances are successively introduced without the costly haggling that attends such changes when parties to the contract enjoy greater autonomy'."

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