What Really Matters in Spectrum Allocation Design

Abstract

Since initiated in the U.S. in July 1994, auctions have replaced "beauty contests" in the assignment of wireless licenses in many countries. Economists have been involved in constructing the competitive bidding mechanisms chosen, and have devoted considerable analysis to the problems involved. Generally, auction methods have been evaluated according to the receipts generated; social gains resulting from the displacement of activity-distorting taxes has motivated the welfare analysis. Yet, policies widely advocated by economists to intensify license bidding , such as reservation prices or bidding credits for "weak"' bidders , may impose deadweight losses that dominate revenue raising efficiencies. Yet, retail market effects are largely excluded from cost-benefit calculations of rules to assign licenses. This paper reviews a number of case studies suggesting that economic analysis is most usefully focused on consumer welfare in wireless service markets, the outputs resulting from license use. Econometric evidence from mobile phone markets in twenty-nine countries suggests that auctions do not lower prices or increase usage, while liberalization, increased spectrum allocations and more competitive markets -- produces such pro-consumer results. We use simulations to compare the net social benefits of liberalization against policies suggested in the auction literature to enhance license bids. We argue that increases in bandwidth and competitiveness produce consumer benefits that generally dominate social gains from rent extraction via wireless license auctions.