FCC Auctions Research Articles

Understanding Spectrum Prices in Recent Upper Mid-Band Fcc Auctions

Understanding Spectrum Prices in Recent Upper Mid-Band Fcc Auctions

Novel-Infrastructure Bidders' Impact on Cost-Based Subsidy Auctions: Evidence from RDOF Phase I

FCC Auction 904 (“RDOF Phase I”), a reverse-subsidy auction for broadband ISPs, determined its reserve subsidy amounts using the Connect America Cost Model (CAM). The CAM estimates the incremental cost needed to provision broadband service at a location, based in part on fixed-line infrastructure models such as fibre-optic or cable networks. The auction rules also included clear preferences for higher quality services, but incorporated other aspects of technology neutrality. In the end, three of the top four winning bidders, who collectively received over one-third of awarded subsidies, were not fixed-wireline incumbent ISPs. One of these bidders, SpaceX, committed to provide broadband internet service using a constellation of low-earth-orbit (LEO) satellites, and was awarded about 10% of total subsidies in the auction. Since the cost structure of deploying broadband using LEO satellite constellations likely differs greatly from the cost structure underlying the CAM model (and therefore RDOF Phase I’s reserve subsidies), we use the RDOF Phase I results to address a series of questions. First, did LEO satellite ISP participation in RDOF Phase I affect awarded subsidy amounts in areas where their cost structure was advantaged relative to the CAM model? Second, did LEO ISPs win by out-bidding lower-quality competitors (reflecting a local demand-side advantage) or by out-bidding high-cost incumbents (representing a supply-side advantage)? We conclude with a discussion of the implications of the auction’s structure for promoting cost-reducing innovations in broadband provision technology.

Network Value Drivers in a 5G World

5G upends many assumptions about the wireless industry. From the consumer perspective, speed, latency and number of connections will far surpass current expectations. From network operators’ perspective, integrating previously unusable mmW (mmW) and upper mid-band frequencies and significantly increased demand for backhaul will rearrange the relative value contribution of these network components. Traditional valuation relationships will change and will require updating in a 5G world, such as the economic relationships that drive spectrum and backhaul value. Although the rules of value creation have not changed, the realization of value creation is changing. In particular, based on FCC auction data, this paper empirically evaluates the factors that influenced value of traditional wireless spectrum and evaluates whether the same models can be applied to make value inferences for mmW spectrum bands, as well as the change in relative value between urban and rural geographies. We find that the factors that explain spectrum value for lower and mid-band spectrum are not the value drivers for the mmW spectrum, and do not perform well in explaining the geographic variation in value either. Based on this finding we investigate whether the strategic relationship between wired networks and wireless networks had greater complementarity for mmW than the traditional spectrum bands

The Evolution of U.S. Spectrum Values Over Time

Using data on all FCC auctions of spectrum related to cellular services from 1997 to 2015 we attempt to identify intrinsic spectrum values from winning auction bids. Our analysis includes 15 auctions and close to 7,200 observations. We add two components to previous literature on this topic. First, we control for license and block specific auction rules. Second, we introduce two technological measures to separate out technological progress that effectively reduces spectrum scarcity from technological progress that increases demand for mobile applications. Previous papers have included simple time trends to reflect technological changes. Time trends are unable to distinguish across markets within the United States and conflate the effects of these two types of technological progress. Our results confirm previous theoretical and empirical findings for basic measures of demand such as population, population density, income levels, frequency levels, bandwidth and paired bands. We were surprised that 47 percent of all cellular licenses since 1997 have been won by small bidders: 42 percent were won using small bidder credits, 5 percent were won in set-aside/closed licenses, and 10 percent were won in closed licenses using bidding credits. Adjusting for the value of these licenses, this represents 27 percent of the real dollar value of these licenses. Our results further quantify the negative impact on headline winning bids when won using bidding credits. Increased spectral efficiency appears to be reducing spectrum scarcity as evidenced by its lowering of winning bids. Additionally, auction results confirm that the relative value of higher frequency spectrum is increasing over time.

Foreign Reactions to U.S. Auctions: Implications for U.S. Bidders in Foreign Countries

In this study, we examine the implications of FCC Auctions for U.S. companies in foreign countries. We show that U.S. auctions will have the most detrimental effect on U.S. companies planning to serve the most attractive foreign markets. For moderately attractive markets, establishing a joint venture with a firm in the target country is crucial. The least attractive markets can become more attractive when their neighboring countries are served by U.S. companies. We discuss the foreign retaliation upon U.S. telecom auctions, U.S. companies' responses, the pressure from the U.S. Congress on the FCC, and FCC's strategies. We conclude by analyzing the foreign reactions to U.S. auctions, these reactions’ implications on the FCC, and the offsetting trends. Finally, we recommend some strategies to FCC.

Auction 97 and the Value of Spectrum

Using econometric methods and data from prior spectrum auctions, this paper evaluates the design of the FCC's Auction 97. We find that the elements of the auction's design, including the size of license areas, reduced auction revenues by as much as $21 billion.

Spectrum Allocation Methods: Studying Allocation through Auctions

 Abstract—Auctions have been used as a mechanism of selling goods and services for thousands of years.The earliest example of auctions can be traced back to AD 195 when Roman Empire was auctioned off to Julianus. There are numerous examples of Auctions in our daily life but auctions caught the imagination of economists, governments and common people alike when spectrum rights were auctioned by FCC in 1994 in the US. Prior to using auctions for spectrum allocation other methods like administrative process, lottery and first-come-first serve were widely used. Since FCC's auction a number of countries switched to auctions for spectrum allocation because of there comparative advantages over other methods. This paper critically analysis the pros and cons of different methods used in spectrum allocation. The method of using Simultaneous Ascending Auctions in allocation of spectrum is discussed along with the advantages that may accrue from this method.

The Economic Implications of Restricting Spectrum Purchases in the Incentive Auctions

This paper contains two chapters on the economic impact of proposed FCC restrictions on participation in the 2015 spectrum auction, which would limit access to additional spectrum by large incumbent Internet Service providers (ISPs). The first chapter by Holtz-Eakin and Bazelon reports that such restrictions could reduce FCC auction revenues by as much as $12 billion or 40 percent, which in turn could mean that the FCC would be unable to purchase the full amount of spectrum being made available by broadcasters. They further report that this large shortfall could lead to a series of declining revenues and fewer frequencies allocated, and jeopardize funding for the new national network, FirstNet, planned for the exclusive use of public safety personnel. The second chapter by Shapiro reports that restricting auction participation by large, relatively-efficient incumbent ISPs would shift spectrum resources towards less efficient mobile carriers. This shift also would force the large incumbent carriers to deploy more costly responses to fast-rising consumer and business demand for bandwidth, raising prices and thereby slowing the transition to 4G technologies. Further, the slower transition to 4G would dampen the employment growth that should otherwise follow from the adoption of more advanced Internet technologies. Shapiro estimates that those effects could more than 118,000 jobs by 2017.

The ‘Google effect’ in the FCC’s 700 MHz auction

We describe and interpret bidding behavior in FCC Auction 73 for the C-block licenses. These licenses were initially offered subject to an open platform restriction, which was highly valued by firms such as Google. Google entered bids until its bids reached the C-block reserve price, thereby ensuring that the open platform restriction would be applied to the licenses. Later in the auction, other bidders outbid Google, so Google was able to trigger the open platform restriction without having to purchase any of the licenses.

The effect of incumbent bidding in set-aside auctions: An analysis of prices in the closed and open segments of FCC Auction 35

This paper examines the impact of an incumbent carrier's participation in two simultaneously conducted auctions: one set-aside for non-incumbents and one open to all carriers. This paper estimates the extent to which prices in the closed auction were inflated by the participation of incumbents. This paper also estimates what prices would have been in the open auction had incumbents been excluded from bidding in the closed. It is found that an incumbent's participation in the closed auction through a front, Alaska Native, enabled it to win more licenses at lower prices in FCC Auction 35. In contrast, non-incumbents won fewer licenses and paid more for what they won. The econometric techniques employed here to estimate prices in a “but-for” world could be replicated in future damage analysis. Finally, this paper suggests an alternative method of screening bidders seeking access to set-aside auctions that would be consistent with the FCC's goal of promoting competition in the wireless industry.

A Branch-and-Price Algorithm and New Test Problems for Spectrum Auctions

When combinatorial bidding is permitted in auctions, such as the proposed FCC Auction #31, the resulting full valuations and winner-determination problem can be computationally challenging. We present a branch-and-price algorithm based on a set-packing formulation originally proposed by Dietrich and Forrest (2002, “A column generation approach for combinatorial auctions,” in Mathematics of the Internet: E-Auction and Markets. The IMA Volumes in Mathematics and Its Applications, Vol. 127, Springer-Verlag, New York, 15–26). This formulation has a variable for every possible combination of winning bids for each bidder. Our algorithm exploits the structure of the XOR-of-OR bidding language used by the FCC. We also present a new methodology to produce realistic test problems based on the round-by-round results of FCC Auction #4. We generate 2,639 test problems, which involve 99 items and are substantially larger than most of the previously used benchmark problems. Because there are no real-life test problems for combinatorial spectrum auctions with the XOR-of-OR language, we used these test problems to observe the computational behavior of our algorithm. Our algorithm can solve all but one test problem within 10 minutes, appears to be very robust, and for difficult instances compares favorably to the natural formulation solved using a commercial optimization package with default settings. Although spectrum auctions are used as the guiding example to describe the merits of branch and price for combinatorial auctions, our approach applies to auctions of multiple goods in other scenarios similarly.

Regret, Learning and Risk Aversion in First Price Sealed Bid Auctions

Understanding bidding behavior in Sealed Bid First Price (SBFP) auctions for a single unit in the independent private value setting is important because it can provide relevant insights into what to expect in complex real world settings. Laboratory experiments are used to test existing theory, and provide insights for developing new theory. One fundamental puzzle about SBFP auctions that received a great deal of attention in the experimental economics literature is why do participants generally bid above the Risk Neutral Nash Equilibrium (RNNE). This result has been replicated numerous times by different researchers at different laboratories and under a variety of environments, but the reason for overbidding has never been fully understood. According to Kagel (1995), . . risk aversion is one element, but far from the only element, generating bidding above the RNNE. (p. 525). Engelbrecht-Wiggans (1989) suggested that the desire to avoid regret may be motivating bidders in SBFP auctions. Although the theory of regret has been used to explain some well-known anomalies in expected utility theory, this notion has never been applied to auctions prior to Engelbrcht-Wiggans (1989), and has never been tested in the auction context. The aim of our proposal is to systematically test the Engelbrecht-Wiggans (1989) theory of regret in auctions, with the specific view of separating the role of regret from that of risk aversion. As we gain a better understanding of behavior in SBFP auctions, we will also extend and refine the theory to incorporate the new insights and to explain some of the existing puzzles. In the sequence of experiments we propose, human bidders will compete against computerized bidders programmed to play risk-neutral Nash equilibrium (RNNE). Human bidders will have the same values for a number of rounds, thus allowing them to learn, and bidding strategies will be restricted in a variety of ways. It is our conjecture that this setting will be more conducive to learning than the traditional setting, and therefore, if overbidding relative the RNNE is due to errors, we should see a substantial trend towards lower bids. If we find that overbidding persists, we will conduct the second study, aimed at separating the regret and the risk-aversion explanations by having bidders bid in a number of auctions simultaneously while restricting their actual bids to be the same for all auctions. Risk averse bidders should overbid substantially less when they are paid based on the outcome of several auctions than when they are paid based on the outcome of a single auction. But bidders who are motivated by the desire to avoid regret should continue to overbid relative to RNNE because regret is cumulative and does not cancel out. Implications of our work go beyond the laboratory because over the past two decades auction theory has been used extensively to help design real world auctions and exchanges. Examples of these new auctions include the FCC auctions for spectrum licenses, electric power auctions, auctions for transportation services, and different types of procurement auctions. These mechanisms are complex, and designers must make decisions about many aspects of auction rules that are likely to have a profound effect on the auction's efficiency,the sellers' revenue and the buyers' profits. To make good design decisions in the real world we need to further our knowledge about the basic forces behind bidding behavior, and understanding why people bid above RNNE in SBFP auctions is an important step towards bridging the gap between auction theory and the practice or market design.

The Impact of Incumbent Bidding in Set-Aside Auctions: An Analysis of Prices in the Closed and Open Segments of FCC Auction 35

We examine the impact of an incumbent carrier's participation in an auction set-aside for non-incumbents that was conducted simultaneously with an auction that was open to all carriers. We estimate the extent to which prices in the closed auction were inflated by the participation of incumbents. We also estimate what prices would have been in the open auction had incumbents been excluded from bidding in the closed. We find that an incumbent's participation in the closed auction through a front, Alaska Native, enabled it to win more licenses at lower prices in FCC Auction 35. In contrast, non-incumbents won fewer licenses and paid more for what they won. If the FCC's goal is to promote competition in the wireless industry, we suggest an alternative definition of control that is grounded in the antitrust literature.

The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions

This is an exploration of how bidding behavior of firms in various auctions is affected by their capital structure. The theoretical model considers a first-price sealed bid and an English auction. We find that as debt levels increase, firms tend to reduce their bids. The lower bids give the competition incentives to reduce their bids as well. These results are investigated empirically using data from the 1994--1995 FCC spectrum auctions. Consistent with the theoretical model, higher debt levels of the bidding firm and of the competition tend to lead to lower bids. Additional determinants of bidding behavior in these auctions are also analyzed. Copyright 2002, Oxford University Press.

Building economic machines: The FCC auctions

The auctions of the Federal Communication Commission, designed in 1994 to sell spectrum licences, are one of the few widely acclaimed and copied cases of economic engineering to date. This paper includes a detailed narrative of the process of designing, testing and implementing the FCC auctions, focusing in particular on the role played by game theoretical modelling and laboratory experimentation. Some general remarks about the scope, interpretation and use of rational choice models open and conclude the paper.

Mutually Destructive Bidding: The FCC Auction Design Problem

In general, synergies across license valuations complicate the auction design process. Theory suggests that a “simple” (i.e., non-combinatorial) auction will have difficulty in assigning licenses efficiently in such an environment. This difficulty increases with increases in “fitting complexity.” In some environments, bidding may become “mutually destructive.” Experiments indicate that a properly designed combinatorial auction is superior to a simple auction in terms of economic efficiency and revenue generation in bidding environments with a low amount of fitting complexity. Concerns that a combinatorial auction will cause a “threshold” problem are not borne out when bidders for small packages can communicate.

Auctions and Regulation: Reengineering of Regulatory Mechanisms**

The FCC auctions, beginning in July 1994, were a watershed event in what may be best called reengineering regulation. It was the first time a new market mechanism, in the form of an auction, had been developed especially to replace traditional administrative procedures for regulating access to a natural resource. The spectrum auctions, and the soon to follow trading in SO2 emission rights were the two initial instances in which game theory, and more specifically auction theory, played an essential role in the design of an market-based allocation process. The FCC developed a novel auction format for the spectrum auctions. The replacing of administrative regulatory processes with market mechanisms is a major innovation in regulation, or perhaps more accurately, deregulation.

Monitoring Governmental Disposition of Assets: Fashioning Regulatory Substitutes for Market Controls

Each year the government sells or leases assets worth billions of dollars. The impact on the economy is staggering. FCC auctions to allocate rights to electromagnetic spectrum generated well over twenty billion dollars in the last three years. Proceeds from mineral leases, timber sales, and disposition of real estate from defaulting thrifts have generated another several billion dollars annually. From the taxpayer's perspective, however, government disposition schemes have failed miserably. The government has donated valuable resources to preferred claimants, allocated scarce broadcast and oil rights resources by lottery, and sold both public land and rights to minerals beneath to private parties at a fraction of the market price. The government has also sold timber without any apparent cost-benefit justification, and awarded rights to use electromagnetic spectrum worth billions of dollars to communications giants at a substantial discount. In the article, we analyze the different causes for regulatory failure -- historical, conceptual, and political -- and argue that reforms at both the congressional and administrative level are need to minimize the inefficiency and graft.

Frequency reuse and system deployment in local multipoint distribution service

Following the FCC's auctions for local multipoint distribution service spectrum, the US spectrum holders are expected to go on a rapid move, first toward evaluating the technology in trials, and further toward gradual deployment and commercial availability. The LMDS spectrum will offer new ways to break the local loop bottleneck by delivering a full suite of high-speed service interfaces to business and residential customers. The problem for developers and operators consists in how to efficiently exploit the wide amount of available spectrum for LMDS against challenges such as the propagation characteristics, and the availability and cost of radio technology at millimeter waves. This article presents some of the alternatives and options related to the efficient deployment of LMDS. It starts with a presentation of the duplexing techniques and their specific trade-off and applicability in LMDS. Further on, we consider the subject of frequency planning and reuse. This consists of an overview of the basic mechanisms and algorithms involved, links to related topics in mobile cellular systems, and architectures for reuse optimization in LMDS. Of special interest is the issue of LMDS deployment for gradual capacity upswing, starting with low investment in equipment and a low number of cells and sectors, and going toward more cells with higher capacity per cell. To serve this problem a novel approach to the use of alternative polarization in gradually increasing capacity and sectorization is presented. To justify the target of high capacity and bandwidth utilization, an example of capacity estimation is also given.

The Informational Role of the Minimum Bid Increment Policy in a Repeated Simultaneous Auction with Synergies Between Items

The informational role of the minimum bid increment (MBI) policy in a simultaneous repeated auction is analyzed when there exists synergies between pairs of items and the extent of such synergies is private information. The observed behaviour in the FCC auction namely that each bidder lowers the extent by which he shades his valuation over time is modelled by using a myopic strategy modified for the winning rule that is appropriate for repetitive simultaneous bidding. The seller is better off both in terms of expected revenue and the price obtained for the item using a MBI policy rather than the policy of announcing a reservation (ask) price at the start of each round. A given MBI yields the seller a higher expected revenue when synergies are present. The observed behavior of jump bids, with the size of the equilibrium jump increasing in the extent of synergy, is rationalized by modelling synergies as superadditivity of bidders' common value estimates. JEL Classification: D44, D82.