Equalizing Competition Among Competitors: A Review of the DOJ's Spectrum Screen Ex Parte Filing

Abstract

One important concern for the upcoming and highly-complex voluntary incentive auctions for broadcast television spectrum is the degree to which the largest mobile wireless providers will be allowed to participate. Recently, the U.S. Department of Justice encouraged the Federal Communications Commission to engineer the auction to favor smaller providers in an attempt to equalize competition among mobile wireless competitors. In this Bulletin, we review the Justice Department’s analysis and find significant defects. First, the DOJ’s notion of “foreclosure value” is not a sufficient justification for rigging the auction. The efficiency of an auction’s outcome should instead be based on relative “use value,” and there are good reasons to suspect the use value of larger carriers exceeds that of smaller carriers. Economic theory therefore suggests the presumption should be in favor of non-interference. Second, we demonstrate that the DOJ’s proposal is inconsistent with its own depiction of the mobile wireless market, where firms act as Cournot competitors, face spectrum exhaust, and realize a type of economies of scale in the use of spectrum. Published research shows that under such conditions, spectrum exhaust turns the standard antitrust analysis on its head — namely, that more competitors may, in fact, lead to higher prices and lower quality. Third, we show that case law holds that government intervention, whether by the FCC or the DOJ, should not be directed at equalizing competition among competitors, but the DOJ’s recommendation is plainly aimed at doing so. We conclude that the Department’s proposal effectively seeks to return spectrum allocation to the comparative hearing process, where government — not markets — selects deserving entities for spectrum licenses in a process disguised as an “auction” among preselected winners.