Spectrum Auctions

1 Introduction

• Cell phone carriers need a license to operate (a license to use a certain spetrum
of radio frequencies).

− Cell phone communication is done through radio waves.

− The same kind of signal used by wifi, FM radio, aerial TV, or bluetooth.

− Regulator has to define the spectrum that is available for cell phone communi-
cations, meaning the range of frequencies that will be used by the phone.

• Allocating licenses is a complex problem:

− How many licenses?

− How to split the spectrum? (e.g.some frequencies are better than others).

− What price for a license?

• Structure of the problem

− Potentially many different goods for sale: licenses for different regions, low fre-
quency spectrum vs high frequence spectrum.

− Potentially bidders with different objects: a carrier may want spectrum to add
5G for data transmission; some other carrier may have more modest plans

− Substantial uncertainy about price/value: iliquid secondary market, not many

licenses or auctions, uncertainty about technology evolution.
2 How to Allocate Spectrum?

• A first solution was to run a lottery.

− Strong incentive to participate: large number of participants.

− High risk of misallocation: licenses no assigned to the best carriers, yeilding poor
service to consumers, or resaling spectrums.

• An alternative is to use a beauty contest.

− Public authority spells out the specifications requirec for the operators.

− Candidates submit a project.

− A selection is made by a committee.

• Issues with beauty contest

− Governments usually ask guaranteeing lowest prices to consumers: how to guar-

antee prices for 5-20 years for a products that don’t yet exist?

− Beauty contest can easily lead to favorism/corruption.

− An auction can extract an information (about how much worth are the licenses)
that is unavailable to the government, less so with a beauty contes.

− An auction can potentially raise substantial revenues for the government (by
elicitng bidders’ willingness to pay).
• Designing an auction

− Efficiency: allocate the licenses to those who value them the most.

− Revenue maximization.

− Favor entry: otherwise a game between incumbents with low competition and
thus low revenues.

− Avoid collusion among bidders.

• In a spectrum auction, several items are for sale. Consider the following two ways:

− Combinatorial auction (e.g, VCG)

− Multi-ascending auctions (ascending auctions running in parallel)

3 Simultaneous Ascending Auctions (SAA)

• Auction consists of multiple rounds.

− Round begins with standing high bid on each license (initially the seller), and a
minimum bid increment.

− Each bidder can submit bids on any number of items, subject to an eligibility
and activity rule.

− If no bids on a license, standing high bidder remains. If multiple bids, one bid
selected to be the new high bid.

− Information about bids is revealed; move to next round.

• Auction ends when no new bids are submitted.

• Why simultaneous? .. relative to sequential auctions

− Bidders have flexibility to substitute across licenses or to assemble a package of

licenses, and more information.

− In principle, expect more equalization of prices for similar items, because of

ability to arbitrage in the SAA.

• Why ascending? . . . relative to sealed bidding.

− Bidders obtain information during the auction, which allows them to adapt their
bidding, update valuations, and identify target licenses on the fly.

− Maybe more opportunity for demand reduction, collusion.

Example 1. There are two licenses, a 10Mhz (A) license and a 20Mhz (B) license,
and three carriers, 1, 2, and 3.

Value 10 MHz (A) 20 MHz (B) 30 MHz (AB)

1 100 200 300
2 120 210 290
3 70 120 150

− Efficient allocation: 1 wins B, 2 wins A,

− (Lowest) market clearing prices: 100, 190

• Round-by-round bidding is

Price (A) Price (B) 1 2 3

0 0 A/B A/B A/B − ($0,$0): Everyone bids for both.
30 30 A/B A/B B
− ($30,$30): 3 starts bidding just for B.
80 80 A/B B B
− ($80,$80): 2 starts bidding just for B.
80 120 A/B B
− ($80,$120): 3 drops out completely.
80 170 A/B A
81 170 A/B B − ($80, $170): 2 starts to swith back

81 171 A/B A and forth btw A and B.

.. .. A/B A-B − ($100, $190): 1 stops bidding for A,
100 190 B A and auction ends.
• Bidding is “straightforward” if each round bidders bid for the set of licenses that
offer the most profit at current prices.
Theorem 2.
If bidders have “substitutable” values (e..g, want only one license) and
bid straightforwardly, then SAA leads to an efficient allocation and lowest
competitive prices.

• “Magic of the market”

− Auction outcome is “as if” the seller knew all the values and used a computer
to find the efficient allocation & market-clearing prices.

− That is, the auction discovers the right prices and quantities.

− Bidders have “no regret”—at the final prices, each winner gets exactly the li-
censes that gives it the most profit, and no loser would like to be a winner.
3.1 From theory to practice

• UK auction of 3G spectrum in 1998:

− British gov’t sells licenses for third generation (3G) wireless services.

− There were four incumbents with “2G” services, and several potential entrants
interested in 3G.

− Crucially, the gov’t decided to sell five licenses with the restriction that license
A was only for entrants and incumbents could only bid for one license at a time.

− Auction ends after 150 rounds.

− Four incumbents and one entrant won licenses.

− Auction netted £22 billion (about $39 billion) far exceeding revenue estimates
before the auction (£500 million).
• German GSM (global system for mobiles) auction in 1999.

− Ten nationwide licenses. Bidders allowed to win multiple licenses.

− First bid at 10m DM, then 10% price increments.

− Two strong bidders, Mannesman and T-Mobile (Deutsche Telekom), potentially

interested in buying a lot of spectrum. Other bidders are much smaller.

− What happened in the auction

∗ Round 1: Mannesman bids 36.6m for each of 5 bands.

∗ Round 2: T-Mobile (Deutsche Telekom) bids 40m for the other five bands.

∗ No bids in round 3.
3.2 Problems with AAA

• Demand reduction

− Bidding on more items raise the price on all items. So, there’s an incentive to
bid fewer items.

− There is a scope for tacit collusion via “demand reduction.”

Example 3. Recall Example 1.

− Imagine there is a SAA and prices climb up to $70, $120. Bidder 3 drops out.

− Bidders 1 and 2 know that if they bid “competitively,” prices will rise to $100,
$190, 1 will get A, 2 will get B.

− Instead, they might just stop bidding at $70, $120. Either way they divide the
licenses, each does better than if they continue bidding to $100, $190.
• Exposure problem

− Bidders who compete aggressively risk being exposed when they end up winning
an inferior subset at high prices.

− This “exposure risk” can deter bidders from competing aggressivelly.

Example 4. Two licenses and two bidders

Values A B AB
1 0 0 12
2 10 10 10

− With unceratinty about opponent values, bidder 1 may start bidding but will
have to pay for each to win both.

− Bidders may split items, perhaps at low price.

− The outcome is likely to be inefficient and yield low revenue.

4 VCG mechanism

• Bidders submit their values for all possible packages (could be a lot—2N ).

• Seller finds highest value allocation, sets prices so that each bidder makes as profit
the difference between value with them and without them.

• The outcome is efficient if bidders are truthful.

• Truthtelling is a dominant strategy

Example 5. Two licenses, A and B, and two bidders 1 and 2.

Value A B AB
1 20 20 20
2 0 0 30

− Efficient allocation: bidder 2 gets both A and B.

− SAA: bidder 1 wins either A or B.

− VCG: bidder 2 gets A and B.

4.1 Problems with VCG mechanism

Example 6 (Low revenue). Two licenses, A and B. Three bidders, 1, 2, and 3.

Value A B AB
1 0 0 100
2 100 0 100
3 0 100 100

− Bidders 2 and 3 win A and B, respectively.

− But each pays zero!

− This possibility invites strategic manipulation.

Example 7 (Collusion).

Value A B AB
1 0 0 100
2 20 0 20
3 0 20 20

− Suppose bidders 2 and 3 have lower values.

− If bidders 2 and 3 bid honestly, then 1 wins A and B and pays 40.

− If bidders 2 and 3 bid 100 each, then they win the two items, and pay nothing.
5 Combinatorial Clock Auction

• Clock phase:

− Clock bidding on generic individual item, but can withdraw demand on a license
if a price on “any” license you are demanding increases.

− Allocation and price not determined; only for discovery.

• Proxy Phase:

− Proxy bidding for ascending package auctions.

− Clock bids are entered as package bids; and the bidders can add additional
package bids.

− Seller picks the winning coalition (i.e., the set of compatible packages) that
maximizes revenue, and each winning bid is charged the VCG-nearest core price.
• Assignment Phase: Only the winner bid on preferred assignments, pays VCG-
nearest core.

• Used in

− UK spectrum auctions

− Korea 5G spectrum auctions