An experimental and empirical investigation of the FCC's spectrum auctions

Abstract

Beginning in 1994, the Federal Communication Commission (FCC) started to use auctions for the allocation of scarce radio spectrum licenses. The spectrum auctions have drawn widespread attention as policy makers and economists are interested in how effectively these auctions can raise revenues while promoting efficient allocations. The first chapter provides a broad survey of the PCS auctions and of the developments in Broadband PCS and cellular industries that relate to the PCS auctions. The survey discuss how technology, geography, policy and the firm's industry circumstances affect firms' valuations of the spectrum and are important determinants of the efficient design of the spectrum auctions, as well. The presence of different types of communications providers, cellular providers, wireline providers, and new PCS providers, in the PCS auctions lead to asymmetries in valuations and information. In theory, this structure has a qualitative affect on common value auction outcomes. In laboratory experiments, bidders are found to overbid, much like the findings in previous common value auction experiments, however, the less informed bidders suffer from much stronger overbidding than the informed bidders, and this overbidding can persist over many periods. In the presence of overbidding, additional public information reduced the seller's average revenues. Experience and feedback diminishes but does not eliminate overbidding. In Chapter 3, bidding data from the Interactive Video and Data Service auction, one of the FCC's earliest spectrum auctions are analyzed. Bidding behavior confirms the hypotheses that (1) the larger the area, given the population, the lower the valuation; (2) the larger the population, the higher the income, and the faster the population grows, the higher the valuation; and (3) the number of bidders, the availability of discounts to some bidders, the earlier in the sequence that an auction occurs all positively influence the amount of the winning bid. In addition, licenses in areas with greater population or in auctions with more participating bidders are more likely to be defaulted. Finally, designated entities who receive a bidding discount are significantly more likely to default.