A Stylized Model of the German UMTS Auction

Abstract

This paper discusses some economic aspects of the recent German and Austrian UMTS license auctions. We consider a stylized model of the open ascending auction with incomplete information and market externalities. It is shown that, if the dominant incumbent is not successful in pushing the weakest entrant out of the market, he will face ex-post spurious price increments. We argue that this feature of the German auction design caused a significant risk for the bidding firms. In particular, being aware of these risks, an incumbent may be willing to accommodate the entrant earlier than what one would expect from the valuations alone. We compare our predictions with the observed outcomes.