Spectrum Auction Outcomes Might Hinge on Bidding Rules

The Federal Communications Commission in 2014 is scheduled to conduct an auction to re-allocate as much as 120 MHz of radio spectrum from television broadcasters to mobile service providers.

As much as 102 MHz  worth of new usable spectrum is possible, after accounting for guard bands and spectrum adjustments.

But spectrum auctions always entail some degree of friction between rival bidders, and equally contentious thinking about the best policies to govern such auctions.

The U.S. Department of Justice, for example, thinks there are strategic and marketplace advantages to lower-frequency spectrum (below 1 GHz), and that the two weaker U.S. carriers are at a disadvantage in that regard.

The solution DoJ has proposed is preference for Sprint and T-Mobile USA in bidding for those lower-frequency airwaves. But some economists argue that the greatest efficiency and consumer benefit will arise if no restrictions are placed on the bidding.

The upcoming auction will be different than most prior mobile spectrum auctions, though. The most important difference is that current licensees will have to be induced to sell their spectrum. Obviously, the more money they are offered, the greater the odds they will agree to sell.

The FCC will first take bids in a reverse auction in which television broadcasters will set the prices at which they are prepared to sell their spectrum licenses. The Commission then will conduct a forward auction to allocate that reclaimed spectrum to mobile service providers.

For that reason, any rules that limit the amount of money the FCC can raise will decrease the likelihood that the spectrum actually gets sold, and then redeployed to support mobile communications.

And some argue reserving spectrum for firms such as Sprint and T-Mobile USA will have the effect of reducing the amount of money buyers are willing to pay, thereby reducing the amount of spectrum that actually gets reallocated, a new analysis suggests.

That analysis by Robert J. Shapiro, Douglas Holtz‐Eakin and Coleman Bazelon, published by the Georgetown University Center on Business and Public Policy, argues that the best way to deploy the new spectrum is not to bar AT&T and Verizon Wireless, or any other bidders, from the auctions.

Others argue that the spectrum will be most usefully deployed if the entities best positioned to use it are the entities that win the new spectrum, and also barring some bidders will reduce auction revenues, in turn reducing the amount of spectrum that can be shifted to support new mobile service.

It is counter intuitive, but fiddling with auction rules to bar leading providers, or to favor other contestants, might result in worse outcomes than simply letting all bidders compete. In part, that is because market concentration and consumer welfare are not necessarily and always opposites, as Phoenix Center has argued.

It is understandable that either T-Mobile USA or Sprint might prefer rules that favor them, just as AT&T and Verizon Wireless would prefer not to be limited or barred from participating. 

Those obvious economic interests aside, the matter of what policy is "best," in terms of getting the most new spectrum allocated, sometimes requires analysis. As often is the case, different policies will produce different outcomes.

And the desired outcomes might vary. Some might want "more competition." Others will want "maximum new spectrum," or "greatest efficiency" or "fastest investment." Bid rules can affect and shape desired outcomes.