Increasing Diversity in Telecommunications Ownership and Increasing Efficiency in Spectrum Auctions by Breaking the Link Between Capital Market Discrimination and FCC Spectrum Auction Outcomes

In Section 309(j)4(D) of the Communications Act, the Federal Communications Commission (“FCC”) is required to increase opportunities for minority groups to participate in the provision of spectrum based services. In Adarand Construction, Inc. v. Pena, the Supreme Court held that race-based government programs were subject to strict scrutiny. That is race-based programs must serve a compelling governmental interest such as remedying past discrimination, and must be narrowly tailored to serve that interest. Against this backdrop, a simple theoretical model is developed that explains the relationship between capital market discrimination and outcomes in FCC spectrum auctions. Given capital market discrimination and all other factors being equal, it is shown that a minority firm has zero probability of winning in an auction for spectrum. In addition, it is proven that, if equal bidding credits are given to all firms, if there is capital market discrimination, and if all other things are equal, the minority firm has a zero probability of winning in a spectrum auction. It is shown that a policy of auctioning spectrum, when there is capital market discrimination, is an inferior policy among policies that can be used to allocate spectrum. Finally, a policy of auctioning spectrum, when there is capital market discrimination, results in an inefficient auction. These theoretical results and the empirical literature on capital market discrimination suggest that the FCC is implicitly discriminating against minorities through its auctioning of spectrum under conditions of discrimination in capital markets. The results imply that race-based programs are necessary/justified in order to increase diversity in telecommunications ownership and increase the efficiency of FCC Spectrum Auctions. Given possible legal remedies, the paper contains a critical “audit”/analysis of the FCC’s lending practices under the FCC’s installment payments. Legislative proposals for creating some new form of credit/installment payment in conjunction with some experienced financial institution(s) are summarized and reviewed.