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Working Paper

Spectrum Auction Breakdown

How Incumbents Manipulate FCC Auction Rules to Block Broadband Competition
  • By Gregory Rose, Consulting Economist
June 1, 2007 |

Federal Communications Commission (FCC) spectrum auctions can seem arcane and technical, but in fact, auctions for exclusive licenses to use the public airwaves determine the future of American telecommunications. FCC auctions shape the competitive structure of markets and, ultimately, who controls entire industries—from broadcasting, to telephony, to wireless broadband services—that are increasingly central to U.S. productivity growth, consumer welfare, and global competitiveness. These auctions have complex rules, rules which are the subject of study by a branch of economics called game theory. And it is virtually an axiom of game theory that the rules determine who wins and who loses.

The two studies summarized in this paper comprehensively examine the FCC’s 2006 Advanced Wireless Services (AWS-1) auction. They focus on two aspects of the way information was used by bidders to engage in collusive, anti-competitive, and demand-reduction behaviors. I conclude that the auction rules were manipulated to exclude new entrants to the marketplace from obtaining spectrum in favor of incumbent cable companies, wireless operators, and telephone companies which feared the competition those new entrants represented. Careful analysis of the patterns of bidding behavior in last year’s AWS-1 auction leads to following conclusions:

  • There was a concerted effort by major incumbents in the FCC’s AWS-1 spectrum auction to target those new entrants whose entry represented a significant potential competitive threat if (1) they acquired a national AWS footprint in the AWS-1 auction or (2) they acquired a strong regional or multi-regional base from which they could acquire national footprint in future auctions.

  • The targeted new entrants were met with a tacitly-collusive strategy of blocking bidding, with coalitions of multiple major incumbents making bids for the apparent purpose of denying licenses to the new entrant rather than acquiring the licenses for themselves. A majority of the major incumbents ceased bidding on such licenses after the targeted new entrant ceased bidding.

  • The strategy of blocking was successful. All but two targeted new entrants were denied any spectrum in the AWS-1 auction.

  • There is evidence in the pattern of bids that the major incumbents’ blocking bidding strategy may have been explicitly collusive and the incumbents were willing to pay a significant premium to block the targeted new entrants, indicated by the significantly higher mean price they paid for the spectrum they acquired (2.5 times higher) compared to other bidders.

  • The principal signaling behavior identified was retaliatory bidding, which occurred in the AWS-1 auction at a slightly higher level than in the FCC’s 1996-97 PCS D, E, and F Block auctions. Significant indirect demand reduction effects were observed in the AWS-1 auction, calling into question whether the auction—whatever it’s impact on competition—even succeeded in maximizing revenue for the government.

Both the blocking and retaliatory bidding strategies evidenced in the AWS-1 auction limited competition, adversely affected new entrants and most likely reduced total auction revenue. Both strategies were also available only because bidders were provided with the identities of all other bidders and of the licenses on which they bid in each round. The study concludes with a recommendation that the FCC should adopt anonymous bidding rules for the 700 MHz and for future FCC spectrum auctions. Anonymous bidding remains the only auction rule that can hope to prevent the effective use of retaliatory bidding, blocking bidding and other forms of tacit collusion by incumbents and other bidders.

To view the entire Working Paper, please refer to the PDF document attached below.

The auction rules in the FCC's 2006 Advanced Wireless Services Auction were manipulated to exclude new entrants to the marketplace from obtaining spectrum in favor of incumbent cable companies, wireless operators, and telephone companies which feared the competition those new entrants represented.

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