
The Spectrum Auction: How Economists Saved the Day - ryan_j_naughton
https://priceonomics.com/the-spectrum-auction-how-economists-saved-the-day/
======
goodmachine
The design of the UK spectrum auction of 2000 should be mentioned here. As
well as being pretty interesting from a game-theoretic standpoint, at $34bn
raised, it was the largest auction since AD 195, at least by the reckoning of
the designers:

[http://www.nuff.ox.ac.uk/users/klemperer/biggestpaper.pdf](http://www.nuff.ox.ac.uk/users/klemperer/biggestpaper.pdf)

A colleague who worked on the auction design for the ELSE Centre at UCL ran
some test auctions on student subjects with the premise that buyers were
bidding for the rights to operate a diamond mine, with a guaranteed (and
astronomically large) return. In experiments, bidders were explicitly warned
to save some of their budget over for picks and shovels so they could actually
extract the diamonds, should they win.

When it came time to bid, the students did not heed this advice... and nor did
the telcos.

~~~
davidf18
All the auction does is create a "hidden tax" for cell phone users since all
the company does is pass the costs on to the rate payers. Since cell phones
and smart phones are not a luxury but are now essential, it is a regressive
tax on the poor.

I wouldn't be proud of this. I would rather have seen the spectrum given to
the cell phone providers the way that spectrum was originally given to radio
and TV broadcasters in the US.

~~~
ThrustVectoring
From an economics perspective, taxing the airwaves is just as efficient as a
land-value tax. The market response to something being taxed is to not make as
much of it. As long as the tax is set such that the land or spectrum is still
worth using, it's the closest thing to a free lunch.

And it's not as if taxing the spectrum changes how much more money cell phone
companies would get at different prices.

~~~
davidf18
It is in the best interest of the government to make the key resource of
cellular Wi-Fi as cheap as possible to encourage use just as it is with wire-
line internet providers.

When Google Fiber comes to a city, the prices of competitors drop and the data
speeds increase. The spectrum auction which is passed on as an invisible tax
creates the opposite effect of that desire.

It is an essential resource in today's world, so this tax is not only implicit
and invisible, it is also regressive, adversely affecting the poorest the
most.

> And it's not as if taxing the spectrum changes how much more money cell
> phone companies would get at different prices.

Actually, cell phone providers could make more revenues through increased use
of spectrum at lower prices. Consumer, cell phone provider both win when there
is no auction and the spectrum is given out as it originally was in the US
with radio and TV spectrum.

------
davidf18
Selling spectrum to cell phone providers such as Verizon simply results as a
"hidden" tax as that cost is passed along to the pubic who uses cell phones
(just about everyone).

This implicit tax makes for an inefficient market as it makes cell phone use
more expensive than it should be and thus limits the use for productive
purposes while making it much more expensive for those with low incomes to be
able to use this now essential technology.

~~~
pdabbadabba
Do you have a good alternative to propose? The beauty-contest model didn't
seem to work out too well, because regulators have a relatively poor ability
to determine in advance who will best use the spectrum, and the process
disproportionately rewarded those who were well represented at the FCC. The
lottery system eliminates the latter problem, but greatly exacerbates the
former. In either case, one could rely on secondary market transactions to
reallocate spectrum to more optimal uses, but this would impose a 'hidden tax'
at least as high as simply auctioning the spectrum in the first place.

~~~
davidf18
I propose using the model which had been in place for allocating spectrum to
television and radio (over the air) broadcasting.

I'm not certain why this was down voted. "no taxation without representation."
Implicit taxes should be made explicit.

There are many resources such as mining leases for minerals, metals, oil &
gas, coal, etc. that are leased out to firms at below market values. There are
no auctions for the mining of public lands.

Why make the distinction with spectrum, a new one at that, since as I have
pointed out, TV stations and radio stations were given spectrum for free with
caveats to report the news.

Meanwhile this tax makes use of the spectrum far more expensive that it
otherwise would be creating a politically induced scarcity and artificially
raising prices -- a market inefficiency -- that makes it harder for the poor
and elderly who might are generally on a fixed income to use data on
smartphones and to use smartphones altogether.

~~~
bluedevil2k
Your proposal leads to great inefficiencies in the market though. What exactly
are those TV stations using that VHF spectrum for right now? Nothing. They
switched to digital broadcasts years ago.

And it doesn't make using the spectrum (cell phone service) far more expensive
than it would otherwise would be. It makes it the correct market rate by
making the telecoms figure out how to properly spend the right price on
spectrum and infrastructure to be profitable given the market price of cell
phone service. You need no better example of that than the current cell phone
wars in the US - Sprint and T-Mobile provide cut-rate prices to get customers,
prices that AT&T and Verizon need to match.

~~~
davidf18
I am using market inefficiency in the microeconomics term. The auctioning of
the scarce resource be it land or spectrum results in a politically induced
scarcity (the power of scarcity) resulting in higher prices than in a
competitive market. This politically induced scarcity, or "economic rent"
means people are paying more money for the resource than they otherwise would.
Money that would go towards other goods and services are spent on cell data
instead. Others that at the lower rate without the auction who would
marginally be able to afford the use of the cell phones and data would are no
longer able to do so. This increases inequality.

~~~
pdabbadabba
> The auctioning of the scarce resource be it land or spectrum results in a
> politically induced scarcity (the power of scarcity)...

Spectrum is naturally scarce. Many uses are mutually exclusive due to the
potential for harmful interference. And today there is far more demand for
commercially useful spectrum bands than there is supply. (That, after all, is
a primary reason that this spectrum fetches such astronomical prices at
auction.) Therefore, it is reasonable for the government to erect a legal
regime for allocating this resource efficiently.

> ...resulting in higher prices than in a competitive market.

How so? The whole point of an auction is to approximate the 'free-market'
value of a resource from the outset, thus minimizing the relatively
inefficient secondary market transactions that would otherwise be needed in
order for the asset to find its true price. An auction, after all, _is_ a
competitive market.

~~~
davidf18
> How so?

I was trying to communicate that the companies don't pay for the cost of the
spectrum, the customers do.

Basically, politics have made the cost of cellular communications _to
customers_ higher than it should be in a competitive market.

Economist (and wealthy businessman) David Ricardo brought up the use of
politics to artificially create higher prices using the "Corn Laws" in
Britain. This was the case of putting restrictions and tariffs on imported
grain which resulted in increased prices for land because of the politically
increased scarcity of the grain by limiting imports made domestically grown
grain have a higher price which basically means that more (marginal) land was
brought into production raising the overall value of all land.

Raising the cost of spectrum to consumers creates a regressive tax and
increases inequality.

[https://en.wikipedia.org/wiki/Corn_Laws](https://en.wikipedia.org/wiki/Corn_Laws)

"The Corn Laws enhanced the profits and political power associated with land
ownership. Their abolition saw a significant increase of free trade."

~~~
pdabbadabba
I understand your view is that spectrum auctions increase costs for telecom
providers, and that these costs are passed along to consumers.

What I am challenging is your assertion that these prices are somehow higher
than they would be in a competitive market. I've articulated three primary
objections to this position, none of which you seem to have addressed:

1\. Spectrum auctions can only be said to 'increase' costs relative to some
other, preferable regime. But, as I and others have argued here, there is no
preferable regime, for the reasons that I set forth above.

2\. Spectrum auctions are a form of artificially/politically imposed scarcity.
There is nothing "political" about the scarcity of spectrum. It would be
scarce even if there were no FCC (in fact, it would arguably be scarcer due to
increased interference). So the government must come up with _some_ way to
allocate it efficiently. Auctions are the most efficient choice yet identified
because they do the best job of transferring the resources to those who value
them the most, without requiring a lot of intermediate, inefficient secondary
market transactions.

3\. An auction results in higher prices than would a competitive market. The
whole point of a spectrum auction is that it _is_ a "competitive market" so I
don't understand what you could mean when you say that it results in higher
prices than would a competitive market. Is it your point that auctions result
in higher initial prices than the market would otherwise find through
secondary market transactions if the Commission were to give spectrum away
like candy? If so, this is highly counterintuitive. Why should we believe
this? The point of the auction, after all, is that is reduces the transaction
costs required to find the market price, improving market efficiency, thus
lowering prices.

~~~
davidf18
Perhaps better than using the word competitive, is to use the word efficient
market. Efficient markets increase wealth creation which leads to a better
economy for all of us. Today, cellular data is an essential, not a luxury as
it may have been in the past. Just as the low cost of money is important for
wealth creation to encourage capital investment, cellular data is another
input where taxing it makes for a market inefficiency thus impinging on wealth
creation.

Cell firms that pay billions of dollars for spectrum space (and repeatedly for
new spectrum as technology advances) pass those billions of dollars they paid
on to customers, just as they would the cost of any other input (eg, higher
electric prices, more explicit taxes, higher health care costs for employees).

From the point of view of wealth creation one should strive for efficient
markets, especially in such essentials as cell phone data.

A better solution is to simply give the spectrum away to firms such as
Verizon, AT&T, Sprint, and T-mobile and other existing firms in their markets
just as spectrum was given away to CBS, NBC, etc. for radio and later TV
spectrum. Part of the agreement would be to tax cell firms for overly
expensive customer charges and possibly to give the poor say, some free data.

~~~
pdabbadabba
I'm at a loss. Either I'm hopelessly confused (and I don't think I am), or you
still have not even tried to address a single one of the points I have raised.
That's too bad, because I think this could have been an interesting
conversation.

I'll try one more time, this time coming from a slightly different angle: you
say that the government should just give spectrum away to existing firms,
but...

1\. Which ones? You seem to take for granted that there are only a small
number of firms interested in spectrum and that it will be easy to decide who
gets what. But, in reality, there would be countless firms that would very
much like access to the same spectrum, especially in the biggest markets. Our
experience with spectrum auctions amply proves this. How does the government
choose between these competing firms? How does a new competitor enter the
market if the government always gives spectrum to the big four carriers?

2\. Assuming that the government will not reliably select the firm that would
use the spectrum best (history makes pretty clear that this is the case),
wouldn't this gifted spectrum immediately come up for sale on the secondary
market to be sold to an even more productive user? If so, wouldn't the
secondary market price approximate the would-be auction price (plus the
significant transaction costs that these secondary-market transactions
entail)? If so, the cost of spectrum to the ultimate user would be the same
(and maybe a little higher) than if the spectrum had been auctioned in the
first place, plus a large windfall to the original licensee/seller.

3\. More fundamentally, given that many other firms would also like to have
received the gifted spectrum--and would have paid good money for it (as
spectrum auctions prove)--shouldn't we regard this gift as a massive _subsidy_
to the original licensee and not merely the absence of a tax?

------
bluedevil2k
It should be noted that while the US forward auction is extremely complicated,
with dozens of bidders and hundreds of regions, most national spectrum
auctions are much easier. They typically have 3 or 4 bidders and 4-8 bands for
sale, run the ascending auction described in the article, and last a few days
at most. The only countries where you'll see package bids (aka a combinatorial
auction) is in the richer Western nations.

~~~
dforrestwilson1
Partly this is because the TV broadcast stations are sitting on a lot of
valuable cell phone spectrum. Not all spectrum is equivalently good quality
for cell phone usage.

------
vgkvit
It seems quite generous to say they "saved the day" when in actuality they
granted a handful of monopolists complete control over what was previously a
public resource.

~~~
bluedevil2k
No, they created a competitive open market for spectrum. Any company can bid
in the auction, it doesn't have to be a telecom "monopoly". Private equity
will be bidding, Google will be bidding.

The unspoken truth about when spectrum auctions was handed out by the
government is that crony-ism played a huge part, and led to inefficient
allocation of spectrum.

Another debate can be had about the just finished reverse auction - should the
government pay these tv stations (think your local ABC station) money to buy
back the spectrum they were given for free?

~~~
bnfjrjjfjhm
The notion of granting permanent exclusive right of way to anyone is decidedly
non-optimal. What was once the most efficient use for that spectrum may no
longer be the case, but now you have to fight monopoly forces in order to
achieve efficient use. If spectrum were an infinite resource, sure grant
permanent ownership, but it's not infinite. One spectrum grant precludes
someone else from having access to wireless spectrum.

A much more efficient means would have been automated auctions for 12 month
_leases_ , combined with broadcasters having the capability to automatically
switch to different channels as their spectrum portfolio changes.

~~~
dang
Please don't create batches of new accounts to use only for a comment or two.
This breaks the fundamentals of the community here: HN threads are for
individuals engaging in conversation. Anonymity is fine, of course, but there
needs to be some sort of identity for people to relate to. Otherwise we might
as well have no usernames at all, which would be an entirely different site.

It's particularly bad to do this within a single conversation.

