Peter Cramton Professor of Economics University of Maryland Chairman Market Design Inc 15 July 2011 Special thanks to Larry Ausubel Evan Kwerel and Paul Milgrom for collaborating with me on this topic over the last dozen years Thanks to the National Science Foundation for funding ID: 386810
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Slide1
Incentive Auctions
Peter Cramton*Professor of Economics, University of MarylandChairman, Market Design Inc.15 July 2011
* Special thanks to Larry Ausubel, Evan Kwerel, and Paul Milgrom for collaborating with me on this topic over the last dozen years. Thanks to the National Science Foundation for funding.
1Slide2
Incentive auctions
High value
Mobile broadband
Low value
Over-the-air TV broadcast
Auction includes essential regulatory steps to address market failures in the secondary market for spectrum
2Slide3
Letter from 112 economists, 6 April 2011
3Slide4
Motivation
Year
Value per MHz1985
1990
1995
2000
2005
2010
2015
Value of over-the-air broadcast TV
Value of mobile broadband
TV signal received via cable and
satellite
Explosion in use of smartphones and tablets
Gains from trade
4Slide5
VHF and UHF
bands
54
88
174
216
470
698
512
614
608
37
Lower VHF
Upper VHF
UHF
Public Safety
Current u
ses (TV broadcast)
TV ch 2-6
TV ch 7-13
TV ch 14-36
RA
54
88
174
216
470
698
512
614
608
37
Lower VHF
Upper VHF
UHF
Public Safety
Possible
future
u
ses
TV ch 2-6
TV ch 7-13
TV ch 14-??
RA
Flexible Use
Flex. Use
TV ch 38-51
5Slide6
Voluntary approach
TV broadcaster freely decides toShare with another
Cease over-the-air broadcast
Continue over-the-air broadcast
0 MHz
3
MHz
6
MHz
Spectrum freed
6
For simplicity, I assume that channel sharing is only 2:1; other possibilities could also be considered, including negotiated shares with particular partners announced at qualificationSlide7
Why voluntary?More likely to quickly clear spectrum
Broadcasters benefit from cooperatingLower economic cost of clearingSpectrum given up only by broadcasters who put smallest value on over-the-air signalMarket pricing for clearingAvoids costly administrative
processEfficient clearingClear only whenvalue to mobile operator > value to
TV broadcaster
7Slide8
Two approaches
Combinatorial exchange
Too complex due to repacking
Reverse auction to determine supply
Forward auction to determine demand
Optimiza-tion
gives mandatory repacking options
8
Market clearing and settlementSlide9
Mostly single channelPrice discovery less important=>Sealed-bid auction or descending clockPrice to ceasePrice to share
TV broadcaster freely decides to
Share with another
Cease over-the-air broadcast
Continue over-the-air broadcast
0 MHz
3
MHz
6
MHz
Spectrum freed
Reverse auction to determine supply
9Slide10
Reverse auction to determine supply
13
22
0 MHz
7
31
37
41
3
MHz
9
26
18
35
44
47
6
MHz
Price = $30/MHzPop
P = $30
S = 48
Washington DC
10Slide11
7
13
31
22
Reverse auction to determine supply
9
26
37
41
18
35
44
47
0 MHz
3
MHz
6
MHz
Price = $20/MHzPop
P = $20
S = 36
Washington DC
11Slide12
7
13
31
22
Reverse auction to determine supply
9
26
37
41
18
35
44
47
0 MHz
3
MHz
6
MHz
Price = $10/MHzPop
P = $10
S = 24
Washington DC
12Slide13
Mandatory repacking
7
13
31
22
9
26
37
41
18
35
44
47
5
7
11
9
13
13
15
15
S = 36
P = $20
Supply = 160 MHz
13Slide14
Forward auction to determine demand
Mobile operators want large blocks of contiguous paired spectrum for LTE (4G)One to four 2 × 5 MHz lotsComplementaries strong both within and across regionsPackage clock auction idealWithin region complementarities guaranteed with generic lotsAcross region complementarities achieved through optimization of specific assignments
14Slide15
Package clock auction: OverviewAuctioneer names prices; bidder names package
Price increased if there is excess demandProcess repeated until no excess demandSupplementary bidsImprove clock bidsBid on other relevant packagesOptimization to determine assignment/prices
No exposure problem (package auction)Second pricing to encourage truthful biddingActivity rule to promote price discovery
For details see Peter Cramton,
“Spectrum Auction Design,”
Working Paper, University of Maryland, June
2009.
15Slide16
Forward auction to determine demand
Quantity
Price
P
2
P
3
P
4
P
5
P
6
Supply
P
0
P
1
Demand
16Slide17
Forward auction to determine demand
Quantity
Price
Supply
P*
Q*
17
DemandSlide18
To Treasury
To TV broadcasters
Forward auction to determine demand
Quantity
Price
Supply
P
D
Q
0
P
S
Q*
Broadcasters cannot negotiate ex post with operators, since it is the FCC’s repacking that creates value; ex post trades would not benefit from repacking
18
DemandSlide19
Ways Congress can screw upImpose restrictions on which broadcasters can participate in the auctionDestroys competition in reverse auctionMake repacking purely voluntary
Reverses status quo—FCC can relocate stationsCreates holdout problem in reverse auctionToo greedyImpose specific requirement on government revenue share (e.g., Treasury gets 40% of revenue)19Slide20
To Treasury
To TV broadcasters
Quantity
Price
Supply
P
D
Q
0
P
S
Q*
Not too greedy:
Quantity choice left to FCC
20
DemandSlide21
Quantity
Price
Supply
P
D
Q
40%
P
S
Q*
Too greedy constraint:
Treasury must get at least 40%
21
Demand
To Treasury
To TV broadcasters
Revenue share constraint causes huge social welfare loss
and
reduces Treasury revenues!Slide22
Ways FCC can screw upImpose restrictions on which broadcasters can participate in the auctionDestroys competition in reverse auctionMake repacking purely voluntary
Reverses status quo—FCC can relocate stationsCreates holdout problem in reverse auctionAdopt poor auction designFail to address competition concerns22Slide23
Statutory language: MotivationSince 1993, the FCC has demonstrated an outstanding ability to design and implement auctions
As a result of this outstanding record, Congress should provide the FCC with broad auction authority focused on key objectivesTransparencyEfficiencyProtections to assure success23Slide24
Statutory language: ObjectivesTransparencyEfficiency: Put spectrum to its best social use
Protections to assure program successProtections to assure best available science and practiceLittle more than these objectives is needed in legislation given the FCC’s strong track record in designing and implementing auctions; details are apt to do more harm than good in this case.
24Slide25
The remaining slides provide suggestions to the FCC and further explanation on how to achieve objectives.To meet objectives: Transparency
Unless explicitly and narrowly justified to limit potential collusive behavior among bidders,all elements of the market from qualification, to bidding, to award, to performance will be publically disclosedModern methods will be developed to promote the
disclosure of essential market elements in simple and powerful data bases25Slide26
To meet objectives: EfficiencyAuction design based on long-run efficiency
objective: Put spectrum to its best useOften consistent with best private use, butAdjustments to reflect divergence between social and private value, as a result of competition issues in downstream market for wireless servicesImportant role for competition policy within auctionImportant role for competition policy after auction
Important role for unlicensed spectrum to enhance competitionEfficient auction format thatAccommodates both selling and buying of spectrum rightsFosters effective price and assignment discovery in a multiple round formatHas a pricing and activity rule that encourages bidders to express true preferences throughout the auction process
Bands, standards, and other rules optimized to achieve objective of long-run efficiency
Auction design established in
collaboration
with industry and other stakeholders, but led with critical input from auction design experts with substantial experience in a diversity of auction design settings
26Slide27
To meet objectives: Protections for participants
QualificationRigorous and open qualification to bidDeposit proportional to expected volume as a bid guaranteePerformanceClear rights and obligations for buyers and sellersSimple methods to guarantee performance for parties at riskCompetitionTo assure competition in the auction and long-run competition in the downstream market for wireless services,The FCC adopts a suitable competition policy within the auctionThe FCC adopts a suitable regulatory policy in the wireless market
27Slide28
To meet objectives: Protections for best practice
The FCC auctions must be designed consistent with the best science and practiceExpert auction design services procured via competitive bidThe FCC auctions must be implemented consistent with best science and practiceExpert auction implementation services procured via competitive bidIndependent market monitor (as in all U.S. electricity markets)An independent expert shall be retained with four-year terms by the Chair of the FCCIndependent market monitor
reports directly to the Chair of the FCCIndependent market monitor has available all confidential information on the marketIndependent market monitor reports on a regularly basis (annual report and two biannual reports) on the state of the marketIdentifies potential problemsMakes recommendations on addressing potential problems
Independent
market
monitor is not a judge and does not make rulings
28