1. Federal Communications Commission NSMA Spectrum Management Conference May 20, 2008 Market Based Forces and the Radio Spectrum By Mark Bykowsky, Kenneth Carter, Mark Olson, and William Sharkey

2. Office of Strategic Planning and Wireline Competition Bureau 2 Background and Problem The FCC employs an administrative process to determine whether spectrum should be designated to either licensed or unlicensed operations. This process is very contentious: –FCC may be accused of picking “winners” and “losers.” –Estimating social value of a licensing regime is difficult because parties have incentive to exaggerate its value. The issue is encountered repeatedly: –Advanced Wireless Service 3, –Broadcast TV “White Space,” and Broadband Market Structure Implications.

3. Office of Strategic Planning and Wireline Competition Bureau 3 Tragedy of the Commons The possibility that spectrum users may fail to take into account the negative effect of their spectrum consumption decisions on the value other users place on employing spectrum results in a possible negative externality. In the presence of the negative externality, the equilibrium outcome involves over-consumption of unlicensed spectrum, compared to consumption amount that would maximize the financial value society obtains from unlicensed spectrum

4. Office of Strategic Planning and Wireline Competition Bureau 4 Pure Engineering Solution: Sub-optimal Even if there is no congestion, the pure engineering solution may misallocate resources. The efficient allocation of resources requires balancing the incremental benefits and costs of increasing transmission power. Measures of each may be best provided by price signals. A market mechanism is the best method of obtaining such signals.

5. Office of Strategic Planning and Wireline Competition Bureau 5 Plan of This Research Define an economic environment (e.g. spectrum uses choosing between licensed and unlicensed spectrum; service providers choosing whether to acquire licensed versus unlicensed spectrum) Identify both the efficient and the (Nash) equilibrium allocations of spectrum to competing users in the underlying problem Assign human subjects a “role” (e.g., spectrum user) and some “characteristics” (e.g., capacity utilization preferences, spectrum demand, preference for licensed or unlicensed use) Use financial payments to motivate subject behavior Compare theoretical predictions to the observed experimental outcomes

6. Office of Strategic Planning and Wireline Competition Bureau 6 Congestion Experiments (WP 41 and 42) Subjects must make a decision whether to use either a “Free” spectrum service that is subject to congestion or a non-congestible “Subscription” spectrum service. Each party knows: –The level of his/her demand –The number of possible spectrum users –The price of the subscription service (e.g., price = 40) –The value (V) he/she places on sending a message –His/her congestion tolerance –Payoffs: If Subscription: Payoff i = V i – Fee If Free: Payoff i = V i  congestion ≤ his/her congestion tolerance

7. Office of Strategic Planning and Wireline Competition Bureau 7 Alternative Congestion Etiquettes Co-existence –Do not exclude any user Everyone contests for spectrum Pay to connect –Subjects pay a positive but possibly nominal amount to be served Randomization approaches –Simple randomization: users are served in random order until total demand exceeds acceptable limits –Informed randomization: users first report their personal congestion tolerance, and then users are assigned service so that all high priority users receive satisfactory quality Priority based on reported willingness to pay –Users are served in order of reported willingness to pay

8. Office of Strategic Planning and Wireline Competition Bureau 8 Experimental Results and Nash Equilibrium Predictions Etiquette Example 1Example 2 TheoryExperimentTheoryExperiment Co-existence50.1%42%91.4%57% Pay to Connect96.5%52%91.4%74% Randomization72.8%70%54.7%63% Willingness to Pay66.5%72%76.9%68%

9. Office of Strategic Planning and Wireline Competition Bureau 9 Block #1 Block #2 Block #3 Block #4 Frequency Creating an Auction Mechanism for Licensed vs. Unlicensed Spectrum (WP 43)

10. Office of Strategic Planning and Wireline Competition Bureau 10 Auction Mechanism Bidders who desire licensed (fully private) spectrum, bid as in current auctions by placing “L-type” bids Bidders who prefer to have spectrum designated to unlicensed use place “U-type” bids, which will be subsequently aggregated. The highest L-type bid is compared to the sum of the U-type bids. Comparison not only determines the auction winners, but also the use to which spectrum is designated.

11. Office of Strategic Planning and Wireline Competition Bureau 11 Subject Valuations Value 200 400 100 300 A 400 300 250 200 120 120 80 80 60 60 40 Spectrum Blocks A L-Bidder for 2 nd Block L-Bidder for 1 st Block U-Bidder for 2 nd Block U- Bidder for 1 st Block B A B C D CD E F F E G H G H

12. Office of Strategic Planning and Wireline Competition Bureau 12 Clock Auction Step 1: Auctioneer establishes minimum bid for a block of spectrum (i.e., “clock price”). Step 2: Bidders have opportunity to reveal how many blocks of spectrum they want at the offered price, conditional on a given license rule. Step 3: The “clock price ticks up” (i.e., the price of a block increases) if the number of bids exceeds zero. Step 4: Bidders reveal the number of blocks of spectrum they want at the offered price and at a given license rule. Step “N”: Auction closes when there are no new bids (simple algorithm identifies efficient allocation across users and regime types).

13. Office of Strategic Planning and Wireline Competition Bureau 13 Pricing Rules L-Type winners pay a single, uniform price U-Type winners pay a price that is proportional to the contribution they made to the U-Type winning bid –e.g., if Bidder A’s bid was 50% of the total winning bid, Bidder A is allocated a cost share that is 50% of the winning bid

14. Office of Strategic Planning and Wireline Competition Bureau 14 Auction Simulation

15. Office of Strategic Planning and Wireline Competition Bureau 15 Optimal Assignment #1 #2 Valuations 200 400 100 300 500 400 300 #1 2 #8 #7 #6 #5 #4 #3 Supply Units #8 #7 #6 #5 #4 #3 #1 #2 Valuations 200 400 100 300 500 400 300 #2 2 #8 #7 #6 #5 #4 #3 Supply 250 200 Units #8 #7 #6 #5 #4 #3 L-Bidder for 2 nd Block L-Bidder for 1 st Block U-Bidder for 2 nd Block U- Bidder for 1 st Block Price

16. Office of Strategic Planning and Wireline Competition Bureau 16 Type 1 Nash Equilibrium Valuations 200 400 100 300 500 #3-8 2 Supply Units #1 #2 Valuations 200 400 100 300 500 400 #1 #2 Supply Units L-Bidder for 2 nd Block L-Bidder for 1 st Block U-Bidder for 2 nd Block U- Bidder for 1 st Block Price 250 #3-8

17. Office of Strategic Planning and Wireline Competition Bureau 17 Type 2 Nash Equilibrium Valuations 200 400 100 300 500 #3-8 Supply Units #1 #2 Valuations 200 400 100 300 500 400 #1 #2 Supply Units L-Bidder for 2 nd Block L-Bidder for 1 st Block U-Bidder for 2 nd Block U- Bidder for 1 st Block Price 250 #3-8 201 <200

18. Office of Strategic Planning and Wireline Competition Bureau 18 Experimental Results Average Efficiency Blocks Designated to Unlicensed ZeroOneTwo Session One # Auctions 0112 Efficiency.95.82.981.00 Session Two # Auctions 2172 Efficiency.95.80.991.00

19. Office of Strategic Planning and Wireline Competition Bureau 19 Concluding Comments Under the examined conditions, congestion etiquettes substantially improved the efficiency with which both licensed and unlicensed spectrum was employed by users. Under the examined conditions, a clock auction can often efficiently designate spectrum to its most highly valued use.

20. Thank you! Office of Strategic Planning and Policy Analysis And Wireline Competition Bureau Federal Communications Commission