Spectrum Auctions: Designing Markets to Benefit the Public, Industry and the Economy – review
David Salant
In Spectrum Auctions: Designing Markets to Benefit the Public, Industry and the Economy, Geoffrey Myers unpacks the intricate dynamics and regulatory designs of auctions which allocate “spectrum,” or space on the airwaves, to different bidders. Myers on from his experience managing these auctions in the UK to provide a clear and useful breakdown of the spectrum market, writes David J Salant.
Spectrum Auctions: Designing Markets to Benefit the Public, Industry and the Economy, Geoffrey Myers. LSE Press. 2023.
This book is available Open Access from LSE Press.
In 2000 the UK’s regulatory authority for the broadcasting and telecommunications sector, the Radio Communications Agency (RCA), now part of Ofcom, had to decide how to assign immensely valuable rights to access airwaves for telecommunications services. Myers’ Spectrum Auctions explains the reasons behind the RCA’s decision to use auctions to assign these rights. The RCA had three main reasons for this decision: First, the access to airwaves, or “spectrum” needed to be regulated to manage potential interference between users; second, the highest value users would presumably offer the most for these rights, and Ofcom could rely on information revealed by bids in competitive auctions to determine best use; and third, auctions would ensure those benefitting from access contributed to the national treasury in proportion to the benefits they derived. While the idea of using auctions for allocating access to spectrum may sound straightforward, Myers, who played a pivotal role in managing these auctions, takes on the task of elucidating the enormous complexities facing both the auctioneer and bidders
One main source of complexity is that the spectrum, that is, the space on the airwaves can be split in different ways, and the regulator will have only very imprecise information about values and costs.
One main source of complexity is that the spectrum, that is, the space on the airwaves can be split in different ways, and the regulator will have only very imprecise information about values and costs. The possible allocations are limited by international and technical standards. So, for example in the first UK spectrum auction, the 2000, £22.5 billion for 3G rights, the RCA had to decide how to divide spectrum to balance technical and economic considerations. The RCA could choose between four slots, which would provide each winner with better technical performance, and six slots, introducing more competition in the market. The RCA’s compromise solution was to allocate five slots, three technically suboptimal smaller ones and two larger ones.
Nine entrants were challenging the four incumbents in that 3G auction; the incumbents won all but one block that the RCA reserved for the challengers. The German regulator was criticised for allowing the market to determine the outcome for its 3G auction, which raised almost €50 billion; two entrants and four entrants each won 20 MHz, but the two entrants eventually gave up their licenses. The stakes in these auctions can be quite large, and both National Regulatory Authorities (NRAs) and multinational firms can make mistakes.
Crafting an effective auction design necessitates striking a balance among various factors, including the goals of the NRA, bidder incentives, pre- and post-auction market structure, and prevailing political constraints.
As Klemperer aptly puts it, there isn’t a singular, universally correct auction design. Rather, the approach is more akin to selecting the right horse for the course. Crafting an effective auction design necessitates striking a balance among various factors, including the goals of the NRA, bidder incentives, pre- and post-auction market structure, and prevailing political constraints. Myers clearly explains how a successful outcome requires the orchestration of a diverse range of skills, all collaborating harmoniously and comprehensively addressing virtually every type of decision that an NRA encounters when designing and implementing a spectrum auction. Myers’ insights are particularly useful, as Ofcom can arguably claim to have the most successful track record in spectrum auctions among all telecommunication regulatory agencies.
However, the book delves into an immensely intricate and highly technical subject, and consequently, it exhibits certain limitations. Myers explains “strategic bidding,” (whereby bidders seek to win bandwidth mainly to improve their market position, and to keep it away from rivals can harm consumer welfare) and suggests this behaviour is “wrong” and needs to be prevented. He does not mention, nor does he seem to fully appreciate that oligopolistic bidders have a responsibility to shareholders to try to maximise enterprise value. Moreover, if one oligopolist bids straightforwardly for altruistic reasons, it might end up being marginalised by less altruistic rivals. In short, effective auction designs should yield positive outcomes assuming bidders bid strategically.
The economies of scale in wireless communications are well documented; a firm with a larger market share will tend to have a lower cost per subscriber.
Myers also appears to accept the view that operators with less market share need less spectrum. The economies of scale in wireless communications are well documented; a firm with a larger market share will tend to have a lower cost per subscriber. Allowing such a firm to win a larger share of spectrum will tend to increase these cost asymmetries and worsen ex post competition. Both economic and engineering studies indicate that spectrum asymmetries should be limited to preserve competition. On net, I would be a bit more pessimistic than Myers about the potential for an NRA’s choice of auction design and features to improve ex post competition but would agree with his view that an NRA can put measures in place to prevent an auction increasing ex post concentration.
Chapter 8 compares alternative auction designs, focusing on the two most commonly used multi-round auctions, the Simultaneous Multiple Round Auction (SMRA) and Combinatorial Clock Auction CCA) formats. Both have very complex rules and are designed to allow bidders to bid for multiple licenses (covering different blocks or regions) in a single auction, and to allow bidders to improve bids when topped. The CCA differs from the SMRA in that the former allows package, or “all-or-nothing” bids for combinations. Myers argues that CCAs simplify bidding decisions for bidders when there are complementarities. However, as CCAs are complex, he tends to favour SMR(A)s for situations in which the licenses are mainly substitutes for each other and bidders are not seeking to win complete packages of licenses.
Myers also only provides a cursory description of other auction formats NRAs use, such as the one-shot, sealed-bid auctions for multiple lots employed the French regulator or another recommended to the Dutch NRA. These are quite different than a sealed-bid for one object or a sequence of sealed-bids as discussed by Myers.
The book’s explanations of the deficiencies of the CCA are, arguably, insufficiently critical. A fundamental property of the CCA is that one bidder can pay less for a large package of licenses than a rival pays for a smaller package. This happened in two European CCAs; in one case the differences were more than 30%. This happens because the price each bidder pays is based on what its rivals offers for what it wins. This means that CCA prices can be very unfair, and difficult for bidders to understand, or explain to investors. In the SMRA bidders pay their bid amounts and cannot result in the unfair pricing of a CCA.
While this book provides a quite thorough review of spectrum auctions, it is not a technical guide. For those keen on deepening their understanding of this subject, it would be prudent to supplement their learning by consulting additional resources such as texts by Paul Klemperer’s Auction Theory and Practice, Evan Kwerel and Gregory Rosston’s An Insiders’ View of FCC Spectrum Auctions, offering parallel insights from the US, my own book, A Primer on Auction Design, Management and Strategy: and Vijay Krishna’s, Auction Theory.
This is a very useful book for those interested in learning more about how spectrum is bought and sold.
In summary, this is a very useful book for those interested in learning more about how spectrum is bought and sold. As Myers states, NRAs must “muddle through” to make the best decisions they can despite constrained information and the presence of divergent perspectives among interested stakeholders. This poses a challenging task for regulators, especially considering the enormity of the stakes involved. Spectrum Auctions makes a compelling case for NRAs to be provided with ample resources to effectively oversee auction preparations.
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