An Economic Model of Tiered Spectrum Access

Abstract

This paper develops a theoretical economic framework with the purpose of evaluating the optimal allocation of frequency space between licensed and unlicensed agents. We explore a dominant firm price leadership model where broader property rights over spectrum may be purchased while a competitive fringe enjoys free common access to a different set of frequencies, though with no assurance of protection against interference. The standard model is extended here in two new directions by simultaneously introducing congestion in production activities and quality differentials in output. Our paper describes the corresponding equilibrium pricing decisions and sets the conditions under which a dominant firm and a competitive fringe may co-exist in the market. The regulator plays a key role in these results by determining the optimal share of frequency space assigned to licensed and unlicensed spectrum access, with a view to maximize either consumer welfare or total economic surplus. This allocation choice is shown to depend on a variety of economic and technical parameters, like market scale, cost differentials between firms, product quality and power caps aimed at reducing interference. These insights are relevant in light of the current plans of the Federal Communications Commission for the development of the 3.5 GHz band, envisioned as a low-powered, multi-tiered hierarchical access system.