Spectrum Auction and Investment in Telecom Industry - A Suggested Policy

Abstract

The telecommunication firms operate on the basis of acquisition of airwave space, which is licensed by the government. The usual policy practice in this regard is ascending auction that ensures maximization of revenue for the government. The established view in the literature is that the resulting high license fee is a sunk cost and therefore cannot adversely affect the industry. But this paper shows that high license fee can influence the lending bank's interest charge for which the infra structural investment in the telecom industry suffers and results in lower quantum of services with degraded qualities. The analysis is based on capacity and quantity choice game. The paper looks into the social planner's objective of growth and revenue maximization and observes that these objectives are better realized if a part of the license fee is spent for the subsidization of telecom investment.