A Welfare Analysis of Spectrum Allocation Policies

Abstract

Analysis of spectrum allocation policies in the economics literature focuses on competitive bidding for wireless licenses. Auctions generating high bids, as in Germany and the UK, are identified as "successful," while those producing lower receipts, as in Switzerland and the Netherlands, are deemed "fiascoes." Yet, even full and costless extraction of license rents does not map directly to social welfare, because spectrum policies creating rents impose social costs. For example, rules favoring monopoly market structure predictably increase license values, but reduce welfare. This paper attempts to shift analytical focus to the relationship between spectrum policy (including license auctions) and efficiency in output markets. In cross-country comparisons of performance metrics in mobile telephone service markets, empirical estimates suggest that countries that auction licenses do not achieve lower prices or higher levels of output than other nations. Rather, countries allocating greater bandwidth to licensed operators and achieving more competitive market structures realize demonstrable social welfare benefits. These gains generally dominate efficiencies associated with license sales. Policies to increase auction revenues, such as reservation prices and subsidies for weak bidders, should be evaluated in this light.