14/01/2023 17:49 Writing for Economics: Essay writing

Writing for Economics

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Essay writing
The idea of setting essays is to offer you the chance to make a longer, more
complex argument. Nonetheless, in the model we recommend, the fundamentals
remain the same. In each paragraph, a flow of main idea (thesis) — explanation
/ reasoning (justification) — evidence / example (support) is an excellent
structure to use. If you read through academic writing, you will find this
structure over and over. The same is true for professional writing. There are of
course other structures, however this one always works and makes you sound
concise and clear.

An essay has conventional sections that it is wise to follow. These are an

introduction, main body and a conclusion. The 'LSE' essay structure can be
described as 'say what you're going to say (intro), say it in detail (main body),
say what you've said (conclusion)'. Although this may appear repetitive, it offers
the reader great clarity. Also, if you think about the executive summary,
background, analysis and conclusions / recommendations sections of a business
report, you can see that a similar structure holds.

In your essay, try to follow this structure for your essay sections.

Intro

        Statement about the context of the question — explain why the question in
important (either in the 'real' world or for the discipline of economics)

        Give your answer to the question

        Summarise your argument in support of this answer — this summary

should match the order of your paragraphs

Main body

        Decide on the most logical order of your paragraphs — this might be
importance, chronology or causation, but the basic flow should be simple and
clear

Start each paragraph with a sentence that clearly addresses the

question itself — this will be your thesis for the paragraph and if a
reader only read these opening sentences, they should make sense
one after the other and provide a summary of your argument

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Follow the opening 'topic' sentence with your reasoning and evidence
for why this opening statement is valid. Be specific, not general. The
more detail you can bring in, the more expert you will sound and the
more persuasive your argument will be

Conclusion Summarise your argument again — as you did in the intro (different
words though!)

        Restate your answer to the essay question

        So what? — say what the significance of your answer is either in the 'real'
world or to the discipline of economics

Bibliography

        List the books / articles you read while researching your answer

Below you'll find two essays written by students last year. Bearing the above in
mind, decide which one makes the clearer argument and which, therefore, got
the higher mark.

Essay 1

In the year 2000, there were auctions of spectrum rights for third
generation mobile telephones in several European countries. These
auctions generated very different amount of revenue in different
countries. How can this be explained?

Auction theory as a very useful brunch of game theory is of the great

interest of modern economists. Among other reasons of its popularity stands
direct importance of its ideas to modern businesses and governments.
Nowadays any business sector is more or less competitive, which requires all
it's participants to be dynamic and creative. Modernization and expansion is
a vital part of modern business world. Governments, as owners of resources
that allow businesses to expand and modernize, are always ready to sell
those resources as it will eventually help businesses and certainly bring
revenues.

The best way for government to sell available resources is to declare an

auction. That's where auction theory comes into play. Modern auction theory
is a very powerful tool for designing auctions of very profitable kind. Proper
auction design will rise maximum amount of money for the government and
provide companies with resources they need. However actions that maximize
profits for the government have a direct influence also on the life of the
citizens, as Dixit puts it: "...because of significant contributions the budget,
auctions affect important macroeconomic magnitudes, such as interest
rates".

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So, auctions held by government, and to be more specific properly designed

actions directly influence the life of modern country. In this essay I would
like to make a kind of short review of auctions of spectrum rights for third
generation mobile phones held in Europe in year 2000. The peculiarity of
these auctions lies in the fact that revenues that were generated by
European governments are different as a result of differently designed
actions they held. This fact allows as to trace features of the auctions that
were successful and resulted in relatively high revenues for the government.

There were 6 European countries to held spectrum right auctions in 2000.

They were: United Kingdom, Austria, Germany, Italy, Netherlands and
Switzerland. Let's start with United Kingdom as it was the first country to
hold such kind of auctions.

Strategy that United Kingdom had chosen was selling 5 licenses during
classical ascending auction. Auction resulted in huge revenues: 650 euros
per capita. Firstly it should be said that auctions as any normal business
activity should be competitive in order to be effective. UK spectrum auction
was relatively competitive attracting 13 participants. There are several
reasons why this action attracted so many participants. Firstly, UK was the
first country in the world to hold spectrum rights auction. Participants were
not completely aware of the usefulness of 3G cell phones, but were eager to
get competitive advantage in the new generation mobile communication
technology. Secondly, UK sold 5 licenses to the market with 4 major phone
operators. This fact attracted new entrants, since at least one of the licenses
can be potentially won by new entrants to the market. Both this facts
generated highly competitive auction environment and limited possible
collusions. Result of the auction was a huge success for UK government.

The next country to run spectrum rights auction in 2000 was Netherlands.
This auction raised 170 euros per capita. Reason of such flop, comparing to
the British result was lack of competition. When auction were run there were
5 major phone operators for 5 licenses to be sold. Few entrants decided to
participate in the auction, since everybody was sure that 5 licenses will be
distributed among market leaders. Another factor that made things even
worse was the fact that that was an ascending auction. In this case with few
participants there is a risk of collusion among market leaders. Netherlands
would have generated much more money if they would some how encourage
competition and change the action design in such a way that it would be
possible for participants other than market leaders to place bids
independently of each other to reduce collusion (sealed bid).

Italy generated 240 euros per capita and attracted 6 participants. Italy
intentionally reduced amount of participants by imposing a requirements
that participant of the auction must satisfy. Such situation combined with the
fact that Italian auction was ascending could result in possible collusions

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among competitors. As a result wrong auction design resulted in low

revenues.

Swiss auction was a real flop. They generated only 20 euros per capita. Here
amount of participants was also artificially limited by allowing participants to
join into the groups. And the price that government accepts was also
reduced for some reason. Number of participants was sufficient to run
profitable auction, but combination of officially permitted collusions and low
reserve price resulted in absolutely insufficient revenues.

German and Austrian auctions were similar. Number of participants in both

countries' auctions was low, which means that there were risks of collusion.
Both countries sold licenses in blocks, allowing "number of winners be
determined by bidders". Additionally Austrian government set a very low
reserve price. Germany and Austria generated 615 and 100 euros per capita
in revenue respectively. Germany designed auction in such a way that bids of
two main market players were rationalized in a way that it resulted in high
revenues.

Generally, the main difference in revenues generated from spectrum rights

auctions can be explained by the difference in chosen auction design.
Different auction design results in different amounts of money in revenues.
Countries that tried to facilitate competitive bidding and limited the
possibilities of collusion enjoyed high revenues.

Klemperer say that what really matters in auction design is "robustness

against collusion and attractiveness to entry". Exactly the combination or
lack of one of this factors resulted in the difference in the revenues
generated by European countries. Any country that wants to increase
revenues from auction must try to facilitate the competition among bidders
by trying to make participation in auction as attractive as possible and
eliminating any barriers for participation. There should be no cooperation
between participants, as it will result in lower bids and as a consequence in
low revenues. Countries should not choose auction design that facilitates
collusion, as ascending auction in our case.

Of course there are several other reasons for difference in revenues, among
them there is a fact that UK as a country that run the first spectrum rights
auction in the world, might have enjoyed high revenues simply because
participants were new to the licenses and had no idea of their true value.
Overall economic situations in the counties as well as political might also
result in differences in revenues. But the main reason for difference in
profitability of the spectrum licenses auctions is difference in auction designs
which were effective in some countries and not in the others.

BIBLIOGRAPHY

A.K. Dixit and S. Skeath, Games of Strategy, 2nd edition, Norton, 2004

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Paul Klemperer, Auctions: Theory and Practice Electronic version of book on

http://www.paulklemperer.org/index.htm

Essay 2

In the year 2000, there were auctions of spectrum rights for third
generation mobile telephones in several European countries. These
auctions generated very different amount of revenue in different
countries. How can this be explained?

In the year 2000, European auctions of 3G mobile telecommunication

licenses raised over 100 billion euros in government revenues. The countries
that participated were United Kingdom, Netherlands, Italy, Switzerland,
Germany and Austria. There was a big differential between revenues raised
in each country with United Kingdom leading at 650 euros per capita and
Switzerland coming in last at 20 euros per capita. The reasons for this big
discrepancy in revenues is likely due to poor auction designs and the
sequence in which the auctions took place.

When it comes to auction design, the two crucial components are attracting
entry and preventing collusion. Ascending auctions encourage bidders to act
collusively and deter weaker potential bidders as they know that the
stronger bidder will always out bid him. On the other hand, (first-price)
sealed-bid auctions act in the opposite direction from ascending auctions. It
does not give bidders a chance to collude and encourages weaker bidders to
participate. However, the disadvantage of using a sealed-bid auction is that it
is more likely to lead to inefficient results than an ascending auction. The
reason for this is that sometimes bidders with a lower value may beat
opponents with a higher value. Hence, there is no perfect auction design and
they must be customized to suit different environments and targets.

United Kingdom was the first to hold the auctions and they are a good
example of how a well-planned auction design and good marketing
strategies can lead to a favourable outcome. As there were five licenses and
4 incumbents, they had an ascending auction. To prevent collusion, each
license could not be shared and each bidder was allowed no more than one
license. Also, the fact that at least one license was available to new entrants
lead to fierce competition from nine new entrants. To top it all off, UK had a
solid marketing strategy which was planned over three years (1997 - 2000).
All this helped contribute to UK raising 39 billion euros and being the most
successful out of all the countries that took part in the 3G auctions.

Netherlands, Italy and Switzerland made the mistake of following UK and

carrying out an ascending auction when a sealed-bid auction would have
served them better. This resulted in revenues less than that achieved by UK.

In the case of Netherlands, they had five licenses and five incumbents. This
deterred new entrants as well as facilitated collusion. For example, Deutsche
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Telekom colluded with local incumbents to bid for a 3G license. A sealed-bid

would have worked better as this would have discouraged joint bidding, raise
higher revenues as well as give new entrants a glimmer of hope.

Italy had their auction next but failed to learn from Netherlands and UK.
Their auction design was not robust and failed to adapt to the environment
in Italy. They adopted the UK design but had the additional rule that if
bidders did not exceed licenses, the number of licenses would be reduced.
They did not realize that having one more bidder than license does not
assure that the outcome will be competitive. Also, Italy had failed to
anticipate that firms would react differently to those in Netherlands and UK
as they now had more information. Hence, weaker bidders were discouraged
by previous auctions and did not bother to participate and since the
participation rate was low, it made it easier for the strong bidders to collude.
A bad auction design that was not tailored to the Italian environment and a
low reserve price resulted in Italy only earning less than 25 billion euros.

Switzerland was the most unsuccessful amongst all the countries that held
the auctions. It raised only 20 euros per capita in its ascending auction and
this can be attributed to an unfeasible auction design, badly formulated rules
and an absurdly low reserve price. Since the beginning, weaker bidders were
deterred by the auction form. They felt that they did not stand a chance
against the strong bidders and hence did not bother participating. This
resulted in little competition. Furthermore, The Swiss government committed
auction suicide when they permitted last-minute joint-bidding! This resulted
in nine bidders colluding to become just four. The last mistake that the Swiss
government made was to set a reserve price that was way too low. Since
there were four licenses and four bidders, bidders ended up paying only the
reserve price.

Germany and Austria chose a more complicated auction design.

Germany's auction design was an ascending auction of twelve blocks of

spectrum from which bidders could create four three-block licenses or six
two-block licenses. Germany's auction design was very susceptible to
collusion and deterring new entrants but they were lucky and managed to
earn high revenues.

Austria, on the other hand, adopted Germany's auction design but was not
so lucky and only earned 100 euros per capita. The reason for this was that
there were 6 bidders competing for 12 blocks of spectrum and a very low
reserve price (one-eight of the reserve price in Germany). So instead of
trying to get three blocks of spectrum, the bidders divided the 12 blocks of
spectrum equally and paid the reserve price. This reason lead to Austria
earning less per capita revenue than UK and Germany.

The other factor that affected the amount of revenue earned by each country
was the sequence in which the auctions took place. Looking at the results of
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the 3G auctions held in 2000, it can be seen that the most successful
auctions were the first of their type (United Kingdom and Germany). The
reason for this is that between auctions, bidders learnt from previous
auctions, came up with new strategies and learnt more about their rivals.
However, the auction designs remained almost the same and were unable to
keep up with the new ideas the bidders had come up with. This resulted in
the later auctions not being as successful as the first.

In conclusion, the reason for the different revenues earned amongst the
countries that took part in the 3G auctions is due to the auction designs and
the sequence in which they took place. Revenues depend on how well the
auction design is able to attract entry and prevent collusion. Also, it has to
be able to adapt to new environments. For example, a good auction design
takes into account the information bidders have and the knowledge they
have gained from previous auctions. A sensible reserve price is of high
importance as well and should not be overlooked like in the case of
Switzerland and Germany. Lastly, auction design is not "one size fits all" and
the failure of the government to design an auction that suited the country's
environment lead to different revenues being earned.

References:

A.K. Dixit and S.Skeath, Games of Strategy, 2nd edition, Norton, 2004

Professor Kenneth Binmore, "Economic Theory Sometimes Works"

Essay 1 Essay 2

Writing for Economics

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