Let’s think again: What really Matters in Telecom Auction Design? Alexander Elbittar, Ph.D. Latin American Spectrum Conference, 2012

Market Design  Why are we here? We are here to design a better telecommunication market. That means, to design an efficient and a competitive market.  What can we do? “Economists have lately been called upon not only to analyze markets, but to design them. Market design involves a responsibility for details, a need to deal with all of a market’s complications, not just its principle features. Designers therefore cannot work only with the simple conceptual models used for theoretical insights into the general working of markets.” The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics (2002) Al Roth Nobel Prize in Economics, 2012 Latin American Spectrum Conference, 2012

What kind of tools do we have for market design?  Economic Theory:  Auction theory,  Industrial organization, and  Regulation theory  Computer simulations and data analysis  Experimental methods  Experience (Mexico: 1997, 2005 and 2010) Latin American Spectrum Conference, 2012

Why does management of the spectrum is important?  The management of the radio spectrum is one of the main instruments through which regulatory agencies have based their decisions in order to promote competition within the mobile telecommunications market.  Regulators have two instruments: 1) Allocating the spectrum to the right participants (Efficient a llocation): Empirical evidence (Hazlett and Muñoz, 2008) indicates that countries that have allocated a large portion of their spectrum for commercial development have also attained lower prices for telecommunication services and produced greater benefits in terms of social welfare, reflected in consumer surplus. Latin American Spectrum Conference, 2012

Why does management of the spectrum is important? 2) Make clear and transparent administrative policies for the use, transfer, and commercial development of spectrum: Evidence (Minervini and Piacentino, 2007) also shows that those countries that have provided greater flexibility to concessionaries in the allocation of the spectrum to activities with high economic value have also reached higher levels of traffic and, consequently, have also achieved greater levels of efficiency in their use of spectrum.  Note: These two instruments are separate, but interdependent: the way the spectrum is allocated largely determines the framework for its administration, and vice versa. Latin American Spectrum Conference, 2012

Again: Why do we auction the spectrum?  The main goal of an auction is to promote an efficient allocation by eliciting biddings.  Bids reveal the value of the licenses to bidders (price discovery) and allocate licenses where they are most valued (efficiency).  Note: Since information is asymmetric (i.e., we do not know bidders’ reserve prices), “price discovery” involves rent extractions: Winners get rents in the price discovery process since they do not pay their reserve price in full. Sorry!  Transparency: Auction is a transparent mechanism, not subject to the arbitrariness of a bureaucrat. Auction markets do better than regulators finding the right price. Latin American Spectrum Conference, 2012

Main problems associated with the Auction Design  Problem 1: Credibility of the rules  Rules need to be clear and transparent.  Rules need to be followed.  For example: Do not close (or reopen) the auction at convenience (unless you have specified it as a rule).  For example: Do not forgive improper behavior. Penalize in case of improper behavior (for example, collusive behavior).  Build credibility: Tie your hands (Recall Ulysses and the Sirens)  For example: Look for a publicly credible institution that can verify the transparency and the fairness of the process.  Specify in advance what kind of behavior will not be admissible and what kind of consequences might derive. Stick to that. Latin American Spectrum Conference, 2012

Problems associated with the Auction Design  Problem 2: Efficiency versus Revenue  The main purpose of an auction is the efficiency of the allocation, not the revenue.  Revenue is just a by-product.  If you want to promote higher revenue while keeping it efficient, promote participation.  Sounded reserve prices are good when there are few participants.  Acosta, Elbittar, Carreón and Rivera (2011) found that for each $1.0 peso obtained by the Mexican Government in the 2010 auction consumers would obtain $8.8 pesos in terms of economic surplus. Do the math. Latin American Spectrum Conference, 2012

Problems associated with the Auction Design  Problem 3: Uncertain value of the object (Winner curse)  The auction format needs to be useful for “price discovery”.  Ascending price auction has been a good instrument for that purpose.  Problem 4: Take advantages of potential complementarities (Technological and economic complementarities)  Utility: U(A+B) > U(A) + U(B)  Allow bidders to define the object to be auctioned off (for instance, packages)  Run simultaneous auctions, with package bidding. It helps aggregating demand. Latin American Spectrum Conference, 2012

Problems associated with the Auction Design  Problem 5: Efficient mechanisms are not always politically convenient (Second price seal-bid auctions are efficient but politically problematic)  Use multi-round ascending bid auctions  Still, there is a risk for tacit collusive behavior  Problem 6: Hoarding behavior  The best way to stop hoarding the spectrum is to make the market contestable.  Promote participation. Reduce the barriers to new participants.  Increase the cost of hoarding: Keep auctioning more spectrum.  Actively promote a secondary market for spectrum. Latin American Spectrum Conference, 2012

Problems associated with the Auction Design  Problem 7: Withdrawal after winning  Require an up-front deposit with the possibility of being liable  Do not renegotiate.  In case of default, auction it again.  Problem 8: Collusive behavior  Simultaneous ascending price auctions are open to collusive behavior  Give incentives to new participants (tax break)  Set sensible reserve prices Latin American Spectrum Conference, 2012

Problems associated with the Auction Design  Problem 9: Insufficient participation (Entry-deterrence and predation)  Give the best information you have to all potential entrants.  Use English-Dutch auction rule to promote participation of small bidders: Run an ascending price auction, and make the last top two bidders bid in a first price auction in a final round.  Problem 10: Bounded rationality  We all are boundedly rational. It is not personal, it just a fact.  So try to think ahead and remember: “shoe is on the other foot”. That is what strategic behavior is all about. Latin American Spectrum Conference, 2012

Thanks! Latin American Spectrum Conference, 2012