Spectrum Auctions

The sheer complexity of spectrum auctions can be daunting and it is one of the reasons that so few regulators in Africa have ventured into holding them.  Perhaps the fact that auctions earned a Nobel prize can be a small consolation. They are indeed complex.

Electromagnetic spectrum is a finite natural resource. There are just so many wavelengths that can be used efficiently for communication and there are many entities that we need to communicate with. Satellites, billions of mobile phones as well as bandwidth reserved for emergencies, military and research purposes. How the rights to use bandwidths is allocated has changed over the years.

The “Simultaneous Multiple Round Auction” was actually developed for spectrum licences, specifically the FCC spectrum auction in 1994. Traditional sequential auctions are not optimal for the auction of multiple licences in multiple regions. In a situation where an operator is interested in several licenses, but only if they could get them all the uncertainty about winning all of the auctions, would depress bids in the first auctions and affect the overall outcome.

Until then spectrum licences in the USA had been distributed by the beauty contest approach which was replaced by a lottery. Especially the lottery gave quite unsatisfactorily results both in terms of revenue and spectrum distribution. It was not unusual for licenses to be won by entities that had no interest in using the spectrum but had only joined the lottery to be able to sell the spectrum to the highest bidder.

It is interesting to note that this form of auction was not only a purely theoretical scientific discovery, it was also enabled by advancements in computer science that had finally developed software that could support such a complex simultaneous auction with several dependencies and interconnections.

The world’s first simultaneous spectrum auction brought in 627 million USD for 10 licences that were auctioned over 47 rounds. Since then the model has been adjusted and developed in various ways. For example bidding on “packets” of licences rather than individual licenses is common in the EU.

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Tommy Andersson, member of the committee for the Prize in Economic Sciences, explain what the prize is about.