West Coast Line - Winner's Curse?

Photo: Virgin Trains

Furore over First Group's award of West Coast Line franchise, though no media article has mentioned 'Winner's Curse' by name. It's been directly alluded to - did FirstGroup over pay? (Market thought so, FG's share price falling 6%. Proxy share price for Virgin Trains rose nearly 2%.) Put another way, the NPV of the FirstGroup bid is around 13% higher, with a 10.4% compound annual revenue growth versus Virgin's 8.5%.

Winner's Curse is the economic phenomenon that a winning auction bidder bids more than everyone else (obviously), so has likely over-estimated the value of the asset.  In theory common information and effective learning should reduce magnitude of the 'curse'. Empirically, it's still very hard to avoid. (Simple practical advice is the obvious 'bid less than you think it's worth'.)

Likely, information wasn't common - Virgin having greater data and experience on the line. Compounded, growth at 10.4% versus 8.5% is a pretty big one third higher. In Winner's Curse the winner often doesn't feel that good when they find out by how much they won! Wonder how FirstGroup will feel next morning?

As a taxpayer the question should be how backloaded FG's payments to Treasury are spread? If too much, then has FG won with perhaps less risk to them than it seems? And are performance bonds correctly sized through time to incentivise FG the way passengers would want?  

The answers to these questions should come out soon. The question of the size of the Winner's Curse will take longer to answer.