1. Osaka-Gakuin University, Japan
Modified Lease Auction: A Controlled Market System for Allocating Radiowave Spectrum　
Hajime ONIKI
Osaka-Gakuin University, Japan
May 2002

2. Contents I. Use of Radiowave Spectrum in Japan
II. Modified Lease Auction (MLA) ---- A New System
III. A System for Transition from the Current System to the Long-term Target, MLA
IV. Functions of Government under MLA
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3. I. Allocation of Radiowave Spectrum in Japan
A. History
B. Present situation
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4. A. History
allocation and assignment controlled by the Japanese government – central planning
licensed on first-come basis or by discretion
no rent paid by users for spectrum use
increase in demand for spectrum due to technological progress 　　　
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5. B. Present situation
shortage of spectrum supply --- frontier exhausted
extreme inefficiency of spectrum use -----
imbalance in productivities (MP’s) of spectrum
incumbents have no incentive to save spectrum
incumbents have strong incentive to keep spectrum
need for a new system of spectrum allocation
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6. II. Modified Lease Auction (MLA) ----- A New System
A. Simple lease auction (SLA)
B. Advantages of SLA compared with central planning
C. Advantages of SLA compared with property ownership system
D. Disadvantages of SLA
E. Modified Lease Auction (MLA)
E．Points for future research
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7. A. Simple lease auction (SLA)
spectrum resources owned by government and leased to users, private or public, by auction; lease system to be applied to all users --- no exception
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8. A. Simple lease auction (SLA)
Organization of the supply of spectrum services --- vertical separation
Landlord (“Spectrum-lord”) : spectrum leaser (government)
Provider of spectrum services (provider of “spaces” for data transmission) : spectrum lessee (private or public entities)
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9. A. Simple lease auction (SLA)
c. provider of data-transmission services (level 2): wireless LAN providers, etc.
d. provider of upper-level services (level 3 and above): ISPs, phone companies, etc.
This proposal is concerned with the separation of a. and b.
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10. A. Simple lease auction (SLA)
3. licenses for spectrum lease:
license period --- predetermined (5-10years)
license areas --- predetermined
licenses are given by auction on lease price
resale of licenses --- permitted within allocation specification
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11. B. Advantages of SLA compared with central planning
efficient allocation of spectrum resources ( equal MP’s )
give incentive to save spectrum use --- substitution by other means ( fibers, e.g.) for spectrum
remove barriers against entry of new business using spectrum
provide transparency (information disclosure)
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12. C. Advantages of SLA compared with property ownership system (1/3)
1. decrease uncertainty
2. give more flexibility in spectrum use
prevents “holding up”
lower transactions cost (negotiation cost)
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13. C. Advantages of SLA compared with property ownership system (2/3)
3. lower bid prices
4. discourage speculation on spectrum
a. prevent bubbles (winner’s curse)
b. lower macroeconomic disturbances
5. prevent windfall profits
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14. C. Advantages of SLA compared with property ownership system (3/3) – wrt “transition”
make possible smooth implementation of lease auction by means of gradual transition from the current system
decrease inequality between incumbents and newcomers at time of transition
give incentive to release spectrum used by government (as well as used privately)
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15. 1. risk of discontinuation (ROD) of spectrum use
D. Disadvantages of SLA
1. risk of discontinuation (ROD) of spectrum use
a. arising from newcomers outbidding incumbents
b. arising from government decision to discontinue
current spectrum allocation (for, e.g., large-
scale spectrum sharing, e. g., uwb)
2. cost of administering auction (with modifications)
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16. E. Modified Lease Auction (MLA) (1/7)
For protecting incumbents against ROD to an appropriate degree
against ROD from newcomers
a. discount of lease price to incumbents
b. auction to be held years before the beginning of
license period
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17. E. Modified Lease Auction (MLA) (2/7)
　 c. use of pre-auctions (winners obtain discount )
d. increasing lease price during license period
e. lease auction with variable license period (needs
decision on parameters)
f. creation of options markets for leasing spectrum
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18. E. Modified Lease Auction (MLA) (3/7)
against ROD from government decision to discontinue spectrum allocation
・ create “ spectrum insurance”
a. spectrum users
i. determine amount insured --- to be paid in case of
discontinuation
　　 ii. pay insurance fee (= insurance-fee rate * amount
insured)
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19. E. Modified Lease Auction (MLA) (4/7)
　　　b. government
i. determines insurance-fee rate (so as to balance
long-term revenues and payments)
ii. chooses spectrum blocks for discontinuation of
allocation so as to minimize the sum of
insurance payments
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20. E. Modified Lease Auction (MLA) (5/7)
economic meaning of ROD
a. the other side of economic growth
b. a price of having flexibility in spectrum
　　　　　 use
c. no ROD in stationary (stagnant) economy
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21. E. Modified Lease Auction (MLA) (6/7)
the degree of ROD (1/2)
　　a. determines the balance between security for
incumbents and chances for entry by
newcomers
b. optimum to be found by trials and errors
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22. E. Modified Lease Auction (MLA) (7/7)
the degree of ROD (2/2)
c. zero: allocation by central planning
　　　　 (assignment by government with automatic renewals)
d. low: auction on right to use spectrum permanently
e. medium: MLA (depends on modification)
f. high: SLA
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23. F. Points for future research (1/2)
why not perpetuity (property ownership system) ?
a. presence of externalities (scale economies ) in the use of spectrum
b. Coase’s theorem does not work because of uncertainty (Nash equilibrium with different information sets) and bargaining time/cost
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24. F. Points for future research (2/2)
2. why not SLA ? (why are modifications needed?)
a. ROD exists everywhere; so why not SLA?
with incomplete and costly information, prevalence of ROD may not be optimal.
b. positive economics for “optimal protection against ROD”?
subjects for future research?
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25. III. A system for transition from the current system to the long-term target, MLA
A. Need for gradual and informed transition
B. Transition periods
C. Transition process
D. Policies for “income compensation”
E. Forecast of results of transition system
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26. A. Need for gradual and informed transition
1. cost of transition arising from the presence of capital stock and human skills fitted to old system
2. information about the overall transition process --- needed for the formation of transition plan by spectrum users
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27. B. Transition periods preparation period ( m years)
a. establishing “benchmark lease prices (BLP)”
b. periodic revisions of BLP
execution period ( n years)
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28. C. Transition process (1/3)
preparation period
a. MLA to be applied to new assignments
zero lease price to incumbents
b. BLP: to be set at auction price if available
else to be calculated by interpolation
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29. C. Transition process (2/3)
execution period
a. MLA for new assignments
b. partial lease price (PLP), equal to
((k/n)* BLP), to be paid by incumbents in
k-th year (k=1,2,…,n)
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30. C. Transition process (3/3)
completion of transition process
a. traversing smoothly to a full-scale MLA
　　 b. all licenses to be issued under MLA with payment of full lease price (FLP) thereafter
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31. D. Policies for “income compensation”
overview
a. (possible) compensation to incumbent spectrum users for the payment of PLP and FLP
b. complete separation of spectrum allocation and income distributon
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32. D. Policies for “income compensation”
2. determination of compensation
a. compensation period : t=1,2,‥,T; no compensation for t > T
b. base amount of compensation (BAC): the value of the spectrum held at t=0 evaluated in terms of current PLP or FLP.
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33. D. Policies for “income compensation”
c. the degree of compensation for period t: d(t)
(0≦t≦1).
may be different for different user categories
d(t) = 0 for t > T.
d. actual amount of compensation in period t : AAC
AAC(t) = d(t)＊BAC(t), t = 1,2,…,T.
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34. D. Policies for “income compensation”
3. policies for compensation:
a. government determines d(t) for each user category
b. near-full compensation: military and security users
c. partial compensation : government users, public utilities, public transportation operators, welfare agents, etc.
d. no compensation : profit-seeking entities, individual users
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35. D. Policies for “income compensation”
4. neutrality
・ choice of a compensation policy does not affect the incentive to save spectrum
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36. E. Forecast of results of transition system
high lease price initially
lower lease prices later
(possible) discount of PLP to incumbent users releasing spectrum voluntarily during transition
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37. IV. Functions of government under MLA (
IV. Functions of government under MLA (*: functions under balanced budget )
A. Allocation of spectrum
B. Maintenance of database of registered licenses, etc.
(*)
C. Protection of spectrum users (*)
D. Conducting MLA (*)
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38. IV. Functions of government under MLA (
IV. Functions of government under MLA (*: functions under balanced budget )
E. Determining the level of ROD
F. Maintenance of spectrum insurance (*)
G. Planning and conducting income-compensation
program
H. As the owner of spectrum
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39. A. Allocation of spectrum
into different objectives, areas
decision whether to continue or terminate allocation
　　a. deregulation -----spectrum sharing
b. minimize the insurance payment at the time of termination
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40. B. Maintenance of database of registered licenses, etc. (*)
license registration
collection of registration fees
disclosure of information
create and publish spectrum-usage statistics
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41. C. Protection of spectrum users (*)
monitoring spectrum use
enforcement of rules
collection of spectrum-user fees
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42. designing and executing auction system
D. Conducting MLA (*)
designing and executing auction system
collection of fees for auction participation
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43. E. Determining the level of ROD
(II.D.1)
balancing ROD and the benefit of new entries
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44. F. Maintenance of spectrum insurance system (*)
(II.D.2)
　collection of insurance fees
　payment of insurance money
　determination of insurance-fee rate
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45. G. Planning and conducting income-compensation program
(III.D)
government determines d(t) for each user category
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46. H. As the owner of spectrum
　spectrum owner (landlord): government
receives PLP and FLP (possibly adjusted wrt d(t)
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