We study the design of auctions for the allocation of essential inputs, such as spectrum rights, transmission capacity or airport landing slots, to firms using these inputs to compete in a downstream market. When welfare matters in addition to auction revenues, there is a tradeoff: provisions aimed at fostering post-auction competition in the downstream market typically results in lower prices for consumers, but also in lower auction proceeds. We first characterize the optimal auction design from the standpoints of consumer and total welfare. We then examine how various regulatory instruments can be used to implement the desired allocation.
