Spectrum auction design: Simple auctions for complex sales

Following the successful PCS Auction conducted by the US Federal Communications Commission in 1994, auctions have replaced traditional ways of allocating valuable radio spectrum. Spectrum auctions have raised hundreds of billion dollars worldwide and have become a role model for market-based approaches in the public and private sectors. The PCS spectrum was sold via a simultaneous multi-round auction, which forces bidders to compete for licenses individually even though they typically value certain combinations. This exposes bidders to risk when they bid aggressively for a desired combination but end up winning an inferior subset. Foreseeing this possibility, bidders may act cautiously with adverse effects for revenue and efficiency. Combinatorial auctions allow for bids on combinations of licenses and thus hold the promise of improved performance. Recently, a number of countries worldwide have switched to the combinatorial clock auction to sell spectrum. This two-stage auction uses a core-selecting payment rule. The number of possible packages a bidder can submit grows exponentially with the number of licenses, which adds complexity to the auction. For larger auctions with dozens of licenses bidders cannot be expected to reveal all their valuations during such an auction. We analyze the impact of two main design choices on efficiency and revenue: simple “compact” bid languages versus complex “fully expressive” bid languages and simple “pay-as-bid” payment rules versus complex “core-selecting” payment rules. We consider these design choices both for ascending and sealed-bid formats. We find that simplicity of the bid language has a substantial positive impact on the auction?s efficiency and simplicity of the payment rule has as a substantial positive impact on the auction?s revenue. The currently popular combinatorial clock auction, which uses a complex bid language and payment rule, achieves the lowest efficiency and revenue among all treatment combinations.     

Low price equilibrium in multi-unit auctions: the GSM spectrum auction in Germany

The second–generation (GSM) spectrum auction in Germany is probably the most clear cut example of a low price outcome in a simultaneous ascending-bid multi-unit auction. The present paper gives an account of the events, describes the auction rules and market conditions, and provides a game theoretic explanation of low price equilibrium in simultaneous, ascending-bid multi-unit auctions. In particular, it is shown that in the unique equilibrium that survives iterated elimination of dominated strategies, the efficient allocation is reached at minimum bids.     

Riding the US wave: spectrum auctions in the digital age

Given its significant technological advantages compared to analog broadcasting, digital television (DTV) will be the television system of the future. However, it requires a full replacement of analog television sets by digital receivers, as DTV can only be watched with special equipment. In order to make this transition happen smoothly without losing the analog television audience, both signals have to be simulcasted until a substantial coverage with DTV broadcasting has been achieved. Australia and the US meanwhile have established a regulatory framework to lead this transition towards the end of analog broadcasting, the so-called analog switch-off. Part of the US regime is the FCC's obligation to reassign analog frequencies after the switch-off has taken place by means of auction. Spectrum auctions, however, originate not from the US but from New Zealand, where they have been used since the end of 1989 and ever since been subject to legal and political criticism. The article outlines the principles of both the DTV and spectrum auctions regulation and shows the links between both areas of telecommunications regulation. It concludes by suggesting that the analog switch-off is a unique opportunity to reconsider current spectrum policies, as it frees large amounts of the radio spectrum that are today occupied by analog broadcasting and will soon be subject to one of the biggest frequency reassignment processes in the history of telecommunications regulation.     

The 5G spectrum auction in Chile

In 2021, the Chilean government implemented a first-price package auction to allocate electromagnetic spectrum for 5G mobile services. The auction was run sequentially for different spectrum bands, allowing firms to exploit band complementarities. It was a combinatorial auction, so firms could bid for any combination of blocks within a band. It contemplated spectrum caps – upper limits on the spectrum for each firm – to ensure competitiveness. The beauty contests used in previous processes became obsolete, as there was a need to promote competitiveness and transparency in the telecommunication sector. Four incumbents and one potential entrant participated in the auction. The auction raised more than USD $450 million, which was six times more than the sum of the revenues of all previous contests in the country. We discuss this experience and show how different aspects of the context justified our design choices.     

Analysis of spectrum auctions in India—An application of the opportunity cost approach to explain large variations in spectrum prices

The remarkable growth of mobile communication has reinforced the significance of the radio spectrum for mobile network operators. The availability of spectrum varies considerably between different countries due to national regulatory decisions. The focus in this paper is on India where operators have access to a limited amount of spectrum. This paper analyses the value of spectrum by estimating the opportunity cost, which is calculated by the savings that can be achieved by acquiring appropriate amount of spectrum rather than investing in additional base stations. The applied approach combines network deployment, user demand levels, cost, and capacity issues, which are integrated in the application in the opportunity cost approach for spectrum. The opportunity cost of spectrum is compared with prices paid at spectrum auctions. The analysis includes a discussion of drivers that determine the willingness to pay for spectrum. The results show that the opportunity cost of spectrum in relation to auction prices is lower than prices operators paid for 3G spectrum in the metro circles (service areas) while the value derived from the opportunity cost is higher than auction prices in the remaining circles.     

Analysing the C-Band spectrum auctions for 5G in Europe: Achieving efficiency and fair decisions in radio spectrum management

This paper offers a detailed analysis of selected regulatory parameters used as instruments to promote efficiency with fairness for all stakeholders (in the legal sense of equity) in 5G spectrum auctions. Data were collected from sixteen auctions for the C-band that took place in the Member States of the European Union (EU) and in the United Kingdom (UK) between 2017 and 2020 for the introduction of the fifth generation (5G) of mobile communication technology. The selected instruments of intervention are: spectrum packaging, spectrum caps, set-asides, geographical scope of the license, license duration, various forms of license obligations, reserve prices and auction format.Significant differences were observed in national approaches to spectrum packaging, license obligations and reserve prices for efficiency purposes. Our analysis also shows that European national regulators are paying increasing attention to concerns over fairness of decisions on spectrum, or equity, especially by creating opportunities for local private networks to access the spectrum and by imposing requirements on network operators to guarantee more uniform population coverage of newly created 5G networks.     

Opportunity cost of spectrum for mobile communications: Evaluation of spectrum prices in Bangladesh

The purpose of this study is to focus attention on the choice of the reserve price made by the telecom regulator to explain the under-performance of spectrum auctions in Bangladesh. The overestimation of the reserve prices for several auctions in Bangladesh including the auction of the 3G – 2100 MHz band in 2013, the 2G - 1800 MHz band in 2015, and the 4G – 1800 and 2100 MHz bands in 2018 is established by comparing the reserve prices to the economic value of spectrum, determined by using the engineering valuation and production function approaches. Possible reasons for the inflation of the reserve price are discussed.     

Recent progress in the empirical analysis of multi-unit auctions

I discuss some recent progress in the empirical analysis of multi-unit auctions, through which a number of important commodities (Treasury bills and bonds, electricity, emission permits, monetary infusions by some central banks) are allocated.     

Resale and bundling in auctions

The possibility of resale increases bidders' incentives to jointly reduce demand in multi-object auctions, because resale increases low-value bidders' willingness to pay and reduces high-value bidders' willingness to pay. Therefore, resale may reduce the seller's revenue. In a simple model with complete information, however, allowing resale and bundling the objects on sale are “complement strategies” for the seller (under reasonable conditions)—by bundling and allowing resale the seller earns a higher revenue than by selling the objects separately and/or forbidding resale. We also show why allowing resale may reduce efficiency.     

Cellular economies of scale and why disparities in spectrum holdings are detrimental

Now that traffic volumes are increasing rapidly, the cost of expanding capacity has become a large portion of expenditures for Mobile Network Operators (MNOs). This paper uses an engineering-economic model to show that there are strong economies of scale when expanding capacity, because an MNO with more spectrum benefits more from every new cell tower, and an MNO with more towers benefits more from every new MHz of spectrum. While it is technically possible to expand capacity by increasing either towers or spectrum holdings, we find that the cost-effective approach is to increase both types of assets at a similar rate. In the absence of countervailing policies, the big MNOs are well positioned to get bigger, in terms of spectrum holdings, towers, and ultimately market share. For policymakers, this economy of scale creates a trade-off between two important objectives: reducing the cost of cellular capacity, and increasing competition. This paper derives the Pareto optimal division of spectrum with respect to these two competing objectives, and shows that any Pareto optimal assignment will split the spectrum fairly evenly among competing MNOs. This is not simply a method of ensuring that there are many competitors; spectrum should be divided fairly evenly regardless of whether the number of competitors is large or small. A large disparity in spectrum holdings may yield poor results with respect to both objectives, i.e. the lower cost-effectiveness of a larger number of MNOs, and the lower competitive pressure of a smaller number of MNOs. One effective way to achieve a division of spectrum that is close to Pareto optimal is a spectrum cap, provided that this cap is set at a level consistent with other policies and policy objectives, including antitrust policy.     

Allocative vs. technical spectrum efficiency

Achieving allocative and technically efficient spectrum management is a key aspect of deregulatory reforms in several OECD countries. However, reform legislation offers few clues as to how these objectives should rank when they conflict with one another. An ‘innocent’ prior acquisition of service-neutral spectrum at an efficiently run auction may prove allocative efficient but fail to be technically efficient if the spectrum is left fallow in the short term. Accountability for the productive usage of a public resource and pressures from short-term political cycles may induce regulators to mandate some minimal level of activity. Two plausible regulatory responses are considered: use it or lose it clauses and spectrum trading incentives. The former favours technical efficiency whilst the latter promotes allocative efficiency. The argument is formalised in a simple economic model buttressing the roles of uncertainty and transaction costs to assert the primacy of allocative efficiency over technical efficiency.     

The evolving 5G case study in United States unilateral spectrum planning and policy

This paper tracks increasingly aggressive initiatives by the United States government to reallocate spectrum on an expedited and unilateral basis well before conclusion of inter-governmental coordination. Rather than embrace the customary commitment to achieve consensus on global spectrum allocations at the International Telecommunication Union (“ITU”), the Federal Communications Commission (“FCC”) has auctioned off large blocks of frequencies for the next generation (“5G”) of wireless services.The FCC might have framed its first 5G auction, reassigning Ultra High Frequency (“UHF”) spectrum, as a one-time deviation from compliance with long standing, intergovernmental coordination procedures. These frequencies have ideal signal propagation characteristics and the Commission could use financial incentives—unavailable in most nations—to expedite “repacking” by incumbent broadcasters willing to move, share or abandon spectrum in exchange for ample financial compensation. However, the FCC has continued to auction off 5G spectrum on grounds that it must find ways to abate an acute shortage of wireless bandwidth and doing so will regain or maintain global leadership in wireless technologies. This paper offers a critical rebuke to unilateral spectrum management, because the short-term benefits expected by the U. S. government likely will be offset by countervailing harms to 5G manufacturers, carriers and consumers. The paper tracks fractious preparation for the ITU's 2019 World Radio Conference by the U.S. delegation and the mixed record achieved there. Additionally, the paper explains how injecting trade, industrial policy and national security issues at the ITU can trigger more delays and disputes, including possible retaliation by nations displeased with U.S. efforts to subvert traditional technology optimization goals.A worst case scenario has the ITU deadlocked and unable to reach closure on “mission critical” spectrum planning issues at World Radio Conferences, convened every four years. The paper concludes that costs and likely challenges to the efficacy and legitimacy of the ITU will reduce the benefits accruing from the FCC's unilateral, spectrum planning campaign.     

Reverse auctions and buyer-seller relationships: A rejoinder to Emiliani and Stec's commentary

In response to Emiliani and Stec's commentary, we present rebuttal to their specific points and further assessment of auctions' role in relationships. We fear the commentators represent a segment of procurement managers closed to using auctions. To help overcome their apprehension, we reemphasize statements in the original article and amplify the role of auctions by referring to the wider relationship marketing literature. The bottom line is that we still believe relational auction is not an oxymoron and our proposed design amendments can create an environment of transparency, fairness, and bilateral communication which leads to further relational strengthening.     

The technical basis for spectrum rights: Policies to enhance market efficiency

This paper describes a conceptual framework to articulate clear rights of access to radio spectrum in a way that would foster an efficient market-based allocation of the resource. In this approach, regulators partition spectrum rights across the dimensions of space, time, frequency, and direction of propagation. They devolve each partition, called a licensed electrospace region (LER), to licensees who may buy, sell, aggregate, and subdivide their LERs at will. All signals outside an LER must have a power level of less than a regulated limit with de minimis exceptions. In addition, even within an LER, transmitter power or field strength must fall below a separate regulator-set level for the band. Licensees may deploy any devices and provide any services that do not violate these rules.     

Polish experience from first-ever spectrum auction

The Polish 4G spectrum auction was a watershed event for the Polish telecommunications market. For the first time in history, the Office of Electronic Communications decided to award spectrum by using an auction process. Polish regulators implemented a simultaneous multiple-round ascending-bid auction, which was widely used worldwide for selling spectrum. The process leading to the auction and the auction itself was lengthy and eventful. Due to the wrong auction design, the auction dragged on indefinitely, causing a delay in spectrum distribution. The auction ended only as a result of the government's intervention, after 8 months (513 rounds) of bidding that raised revenue of over PLN 9 billion (over EUR 2 billion). This paper describes in detail the rules of the Polish 4G auction, analyses bidding behaviour and auction dynamics of the crucial phases of auctions, and presents the final outcomes. It also draws lessons that could help policy makers in Poland and other countries in auction design.     

Sourcing in the global aerospace supply chain using online reverse auctions

This article discusses the use of online reverse auctions to source engineered components in global aerospace supply chains using online reverse auctions and examines the specific case where a long-established U.S. economic cluster supporting large tier-one aerospace companies must compete against globally distributed sources of supply favored by their customers due to unit price savings, principally the result of lower wages. The article also examines if global sourcing practices based on power-based bargaining is an intelligent or effective solution to market pressure demanding lower prices, or whether collaborative problem solving and the creation of knowledge-sharing networks offers greater potential for cost savings and improved long-term supply chain competitiveness. Key factors that contributed to the recent failure of global sourcing initiatives using online reverse auctions are presented. Findings can be generalized to other industries that use online reverse auctions for globally sourcing engineered components that rely on networks of supporting service suppliers to create finished goods.     

Spectrum auctions in a thin market: The Korean case

In 2010, the Korean government adopted spectrum auctions and introduced a market mechanism into spectrum management. However, the government has often been confronted with conflicts between diverse policy goals of spectrum auctions. A thin spectrum market, where only three incumbent MNOs bid for spectrum, has led to concerns that the government may fail to maximize revenues.Based on the past experiences in Korea, this paper examines the Korean government's choice of auction rules in the face of conflicting policy goals. This paper also recommends that the government implement the following regulatory reforms and consider the auction related measures to deepen its spectrum market or increase the number of bidders: (i) relaxation of foreign ownership restrictions, (ii) introduction of regional or site-specific spectrum licenses, and (iii) modification of auction formats. Spectrum markets tend to be thin in many countries, and the Korean experience may offer implications for those countries when they implement spectrum auctions.     

Combining participatory crop trials and experimental auctions to estimate farmer preferences for improved common bean in Rwanda

Participatory crop improvement raises the prospects for developing seed varieties that meet the needs of subsistence farmers but may face challenges regarding preference elicitation, particularly in complicated policy environments. We integrate binding experimental auctions with participatory variety selection to elicit farmers’ preferences for improved common bean varieties in Rwanda. We find that auctions reveal farmer preferences more accurately than stated nonbinding rankings in this context and that participatory on-farm crop research is essential to understanding how farmers evaluate tradeoffs between multiple crop attributes. We also find that farmers highly value intercrop yield despite government policy that encourages farmers to monocrop.     

Bidding asymmetries in multi-unit auctions: Implications of bid function equilibria in the British spot market for electricity

This paper introduces and tests Bid Function Equilibria (BFE) in the British spot market for electricity. BFE extend von der Fehr and Harbord's (1993) multi-unit auction model of wholesale electricity markets by allowing firms to have heterogeneous costs for different generating units. Pure-strategy equilibria in BFE predict asymmetric bidding by producers: a single firm (the “price-setter") bids strategically while other firms (“non-price-setters") bid their costs. We test for asymmetries in firms' bid functions in the British spot market between 1993 and 1995 and find strong empirical support for the theory. We conclude that BFE have important implications for the design and governance of electricity markets.