Best Practice Guidelines for Spectrum Auctions

Introduction

This Guideline explains the relative merits of auctions compared with other approaches to competing for spectrum licenses. It is intended to help governments and financing organizations assess whether an auction is the right tool, what key auction design features to include, and how the prospects for success might be enhanced. While auctions can increase economic efficiency, success in meeting sector development objectives depends also on the business and regulatory environment in each case. Results, in developed as well as developing countries, have been mixed, including some resounding failures that have delayed service development for years and compromised government credibility. There is an extensive literature on this subject drawing on the experience in developed countries, especially the US and Europe, and more recently also on some developing countries (e.g., India, Nigeria). Equally important, competition in terms of network rollout, retail price, or other measures that maximize service development rather than fiscal gain, is an alternative used regularly by some developing countries (e.g., Chile). Contests among firms in terms of their overall capability to deliver services are common among several high-income countries (e.g., Finland). Hybrid forms of competition are used in some other countries (e.g., France). The experience of a selection of number of countries is discussed and distilled.                     

Guidelines

The first issue is when to use auctions, rather than other ways of assigning licences such as competitive reviews, first-come, first-served basis or even other methods.

In short, the first criterio of choice is likely to be whether the frequencies are in excess demand: will there be more firms wanting licences than are available? This clearly depends upon the regulator’s overall policy in issuing licences as frequencies can often be substituted for one another. The key point is that if supply exceeds demand, then a low cost assignment procedure such as first come first served can get the spectrum into use quickly. If the licences subsequently increase in value, then a parallel system of secondary trading will enable them to be rechannelled into their most efficient hands and (if flexibility of use is allowed) more efficient uses.

Where scarcity if foreseeable, the main choice is likely to be between a comparative competitive review and an auction. The pros and cons of comparative competitive review and auction are as follows: 


I - Comparative Competitive Review

Pros:

  • Allows a variety of  bad dimensions to be taken into account (via a properly designed scoring system);
  • May be quick to implement (depending on complexity of bidding and evaluation processes).

Cons:

  • Subject to subjective (and possibly corrupt) influences;
  • Excessive profits (if any)  accrue to successful applicant, not to the government.

 

II - Auctions

Pros:

  • Transparency, with properly designed auction process;
  • Revenues accrue to government;
  • Terms (relating e.g., to service area covered by licence), can be stipulated in contract for which competitors bid;
  • Subsidiary objectives can thus be pursued.

Cons:

  • Successful candidate may overbid (the so-called ‘winner’s curse) and be over-extended;
  • Successful candidate may cut costs and degrade quality to recover high bid;
  • Running the auction may be expensive and time-consuming;
  • Parties may collude in bidding.

These considerations must be weighted in any particular case. To be sure, the trend is strongly in favour of auctions, and the remainder of this Practice Note reviews alternative auction procedures, again listing the pros and cons of each.

The criteria for choosing an auction format are like to include:

-  its ability to deliver the licences to those best able to use them;

-  its ability to raise revenue for the government;

-  simplicity and cost (relative to expected revenue).

Generally, methods which give participants more information about others’ valuations produce better-grounded bids and steer licences to those best able to use them. But they also tend to be more costly as they often involve multiple rounds.


III - Auction Format

Three auction formats are now described:

1.     First-price sealed bid auction. This is an auction where the highest bidder (or bidders, if there are multiple identical licences) wins and pays amounts determined by the winning bid.

Pros:

  • Simple;
  • Completes quickly.

Cons:

  • Bidders may tend to shave bids to avoid over-bidding (the winner’s curse);  in an uncertain environment could lead to much reduced bids;
  • Bidders winning near identical objects may pay widely different amounts which could result in political difficulties.

2.   Second-price sealed bid auction.  Here the highest bidders in a group pay an amount determined by the next highest bid made after theirs. This may seem like a give-away, compared with 1) above, but bidders are prepared to go higher under this format.

Pros:

  • Encourages bidders to reveal true valuations, as the winners pay the ‘marginal loser’s’ valuation;
  • Completes relatively quickly.

Cons:

  • Where the difference between the lowest successful and highest unsuccessful values is large, the winners may pay low amounts.

3.  Simultaneous Ascending Multiple Round (SAMR) auction for either identical or heterogeneous licences.  Here bidders submit bids round by round, successively bidding up prices until a round is reached in which no further bid is received. The auctioneer usually stipulates a minimum bid increment (typically 5%) and requires that bidders participate actively. This is intended to prevent the ‘snake in the grass’ strategy, where a bidder may misrepresent its preferences in early bids by understating its demand. Bidder identities can be kept confidential during the auction, to help eliminate collusion and signaling (this was a feature of the 3G auction in Hong Kong, China in 2001).

Pros:

  • Generates efficiency;
  • All licences sold in one auction;
  • Different prices paid will reflect differences in values between licences under in auction.

Cons:

  • May be time consuming (the UK 3G auction lasted two months);
  • Implementation may be demanding;
  • Bidders may seek to collude by submitting bids which act as signals (this occurred in German 3G auction).


IV - Critical Success Factors in Auction Design

There are two sets of critical success factors to be considered in successful auction design. One set of factors is economic the other set is more technology related.

Economic Critical Success Factors

  • Discouraging Collusion where bidders implicitly through signals or through explicit agreement fail to bid up prices. This can occur in several types including multi-unit ascending and uniform price sealed bid auctions.
  • Encouraging Entrants to participate encourages better prices and better efficiency in the conduct of the auction. Ascending auctions can prevent bids from occurring where potential bidders anticipate an eventual winner. Weak bidders can be excluded and strong bidders essentially joined in bidding.
  • Deterring Predatory Behavior can result in weak bidders being excluded and strong bidders essentially joined in bidding. Aggressive bidding behavior can be communicated in advance, essentially disrupting the bid process in advance.

For a further discussion issues by Paul Klemperer see the Related References below.

Technical Critical Success Factors

Online capability is being used to conduct spectrum auctions. The following critical success factors for automated auction web sites have been identified.

  • Site Design, Content and Support - must be clear, comfortable and easy to use, with good use of colour, typography and white space. An appropriate organization of auction listings and information, 4.2 Consumer Education. Online learning centre: n online learning centre provides knowledge to consumers about online auctions. It is important to have online support and education.
  • Security - an effective encryption mechanism must be adopted by an online auction web site for exchanging information, such as login information, between the auction sites and users, in order to prevent security problems.
  • User Services and Support - Interactive customer services and support: feedback systems, email communications and toll free support calls are basic and critical interactive customer services.

Summary

A number of ways of assigning licences are available to regulators. Where there is excess demand for licences, the main contenders are beauty contests and auctions, with preferences generally shifting towards auctions.  This leaves open the choice of auction format, which can be either a sealed bid or open outcry process, with competitors topping one another’s bids. The choice should depend on particular circumstances, but a wealth of experience is now available to help regulators choose.

References

Paul Klemperer, Auctions, theory and practice Parts III and IV, at: www.paulklemperer.org.

Paul Klemperer, What really matters in Auction Design, at: www.paulklemperer.org.  

Framework for Spectrum Auctions in Canada, Industry Canada, 2001, at: http://strategis.ic.gc.ca/epic/internet/insmt-gst.nsf/en/sf01626e.html

Sinha Sidarth, Spectrum Auctions in India, Indian Institute of Management, February 2001, at: www.iimahd.ernet.in/download.php?downloadid=150

Jain R. S., Spectrum Auctions in India: Lessons from Experience, Telecommunications Policy (issue 25), 2005, at: http://rru.worldbank.org/Documents/PapersLinks/spectrum_auctions_india.pdf

Handbook of Telecommunications Economics, Martin Cave, Sumit Majumdar, and Ingo Vogelsang, eds.,Amsterdam: Elsevier Science B.V., Chapter 14, 605-639, 2002

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