Many scholars advocate that competition for the market can effectively substitute for competition on the market in network industries characterized by natural monopoly characteristics (Demsetz, 1968; Posner, 1972). However, the literature also emphasizes that a lot of potential pitfalls arise when public authorities implement auctions for the award of public-private partnership (PPP) contracts in monopolistic sectors (Crocker and Masten, 1996). One of the most important problems lies in the fact that it is difficult to replace the firm winning the very first auction at the end of the contract. The transaction cost literature (Williamson, 1976; Klein, 1998) suggests that when the incumbent is in charge with the realization of specific investments, a bilateral dependency arises between the firm and the public authority. The problem lies in the fact that the value of these assets would be lost if the firm is replaced. The existence of specific assets then creates a ‘lock-in’ situation that makes it difficult for the public authority to switch to another supplier. As a consequence, the incumbent enjoys a ‘first mover’ advantage over rivals at contract renewals (Williamson, 1975). Whether this advantage is due to opportunistic behaviour or reputational bonus remains an open question.
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