Saturday, September 14, 2013

Auction Policies Should Work, Not Just "Sound Good"

There is a clear difference between policies that work, and policies that don't work, but make people feel as though "something was done."

A colloquial way of putting this is that it is important to be good, not simply to feel good, when "feeling good" does not actually fix a problem, or makes a problem worse.

Spectrum auction and other policies designed to increase competition and innovation sometimes can include clauses that apparently boost competition, but actually have no ultimate positive effect. In at least some cases, those policies to "increase competition" actually can delay the arrival of more effective competition. It's a paradox, but no less true for being so.

Auction policies sometimes contain preferential treatment clauses designed to increase competition. T-Mobile US and Sprint, for example, have argued that the larger Verizon Wireless and AT&T Wireless should not be allowed to bid on reallocated analog TV spectrum, or at least that the two smaller carriers should have some preferences in that auction, to “level the playing field” between the two smaller carriers and the two bigger carriers.

That is not an uncommon regulator approach. It often is believed that “set asides” for specific types of bidders (small businesses, disadvantaged classes of people) is good public policy.

It doesn't work, one study suggests. Restrictive or preferential bidding rules distorts prices and misallocates spectrum in ways that ultimately harm consumer welfare.

Larger carriers often have access to more capital and can build networks faster, for example. In other cases, they are able to operate any particular block of spectrum with greater efficiency, because of other spectrum holdings.

On the other hand, competition and consumer welfare tend to be boosted by reassignment of existing spectrum and the existence of a dynamic secondary market for spectrum.

For example, restrictive and preferential participation rules in place for the 1994 U.S. PCS spectrum auctions resulted in lost consumer welfare of as much as $70 billion, analysts argue.

Underfunded and unfunded business plans developed by new entrants acquiring set-aside licenses resulted in substantial amounts of spectrum sitting idle for many years.

The role of secondary markets also is instructive. Following the PCS auctions in the mid-1990s, all significant new entry into the US wireless market has been through spectrum re-purposing or the secondary market.

In the German 3G auctions in 2000, policies intended to encourage market entry were unsuccessful and resulted in a 10-year delay in the assignment of one-third of the 3G spectrum, delaying its development and the benefits consumers would have otherwise enjoyed.

In Canada and several European countries, restrictive and preferential policies intended to encourage market entry distorted the auction process and were unsuccessful in expanding the number of sustainable competitors in the marketplace.

Initial changes in the competitive landscape, attributable to restrictive auction rules, proved fleeting as market forces pushed the industry structure back to a pre-auction market structure with the same number of, or fewer, national competitors.

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