Pricing Strategies for Spectrum Lease in Secondary Markets

Abstract

<para xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> We develop analytical models to characterize pricing of spectrum rights in cellular CDMA networks. Specifically, we consider a primary license holder that aims to lease its spectrum within a certain geographic subregion of its network. Such a transaction has two contrasting economic implications: On the one hand the lessor obtains a revenue due to the exercised price of the region. On the other hand, it incurs a cost due to: 1) reduced spatial coverage of its network; and 2) possible interference from the leased region into the retained portion of its network, leading to increased call blocking. We formulate this tradeoff as an optimization problem, with the objective of profit maximization. We consider a range of pricing philosophies and derive near-optimal solutions that are based on a reduced load approximation (RLA) for estimating blocking probabilities. The form of these prices suggests charging the lessee in proportion to the fraction of admitted calls. We also exploit the special structure of the solutions to devise an efficient iterative procedure for computing prices. We present numerical results that demonstrate superiority of the proposed strategy over several alternative strategies. The results emphasize importance of effective pricing strategies in bringing secondary markets to full realization. </para>