Transcript Let’s think again: What really Matter in Auction Design

Let’s think again: What really
Matters in Telecom Auction Design?
Alexander Elbittar, Ph.D.
Latin American Spectrum Conference, 2012
Market Design

Why are we here? We are here to design a better
telecommunication market. That means, to design an efficient and a
competitive market.

What can we do?
“Economists have lately been called upon not only to analyze
markets, but to design them. Market design involves a responsibility
for details, a need to deal with all of a market’s complications, not
just its principle features. Designers therefore cannot work only
with the simple conceptual models used for theoretical insights into
the general working of markets.” The Economist as Engineer: Game
Theory, Experimentation, and Computation as Tools for Design
Economics (2002)
Al Roth
Nobel Prize in Economics, 2012
Latin American Spectrum Conference, 2012
What kind of tools do we have for market
design?

Economic Theory:
 Auction theory,
 Industrial organization, and
 Regulation theory

Computer simulations and data analysis

Experimental methods

Experience (Mexico: 1997, 2005 and 2010)
Latin American Spectrum Conference, 2012
Why does management of the spectrum is
important?

The management of the radio spectrum is one of the main
instruments through which regulatory agencies have based their
decisions in order to promote competition within the mobile
telecommunications market.

Regulators have two instruments:
1) Allocating the spectrum to the right participants (Efficient
allocation): Empirical evidence (Hazlett and Muñoz, 2008)
indicates that countries that have allocated a large portion of
their spectrum for commercial development have also attained
lower prices for telecommunication services and produced
greater benefits in terms of social welfare, reflected in consumer
surplus.
Latin American Spectrum Conference, 2012
Why does management of the spectrum is
important?
2) Make clear and transparent administrative policies for the use,
transfer, and commercial development of spectrum:
Evidence (Minervini and Piacentino, 2007) also shows that those
countries that have provided greater flexibility to
concessionaries in the allocation of the spectrum to activities
with high economic value have also reached higher levels of
traffic and, consequently, have also achieved greater levels of
efficiency in their use of spectrum.

Note: These two instruments are separate, but
interdependent: the way the spectrum is allocated largely
determines the framework for its administration, and vice versa.
Latin American Spectrum Conference, 2012
Again: Why do we auction the spectrum?

The main goal of an auction is to promote an efficient
allocation by eliciting biddings.

Bids reveal the value of the licenses to bidders (price discovery)
and allocate licenses where they are most valued (efficiency).

Note: Since information is asymmetric (i.e., we do not know
bidders’ reserve prices), “price discovery” involves rent
extractions: Winners get rents in the price discovery process since
they do not pay their reserve price in full. Sorry!

Transparency: Auction is a transparent mechanism, not subject to
the arbitrariness of a bureaucrat. Auction markets do better than
regulators finding the right price.
Latin American Spectrum Conference, 2012
Main problems associated with the Auction
Design

Problem 1: Credibility of the rules
 Rules need to be clear and transparent.
 Rules need to be followed.
 For example: Do not close (or reopen) the auction at
convenience (unless you have specified it as a rule).
 For example: Do not forgive improper behavior. Penalize in
case of improper behavior (for example, collusive behavior).
 Build credibility: Tie your hands (Recall Ulysses and the Sirens)
 For example: Look for a publicly credible institution that can
verify the transparency and the fairness of the process.
 Specify in advance what kind of behavior will not be admissible
and what kind of consequences might derive. Stick to that.
Latin American Spectrum Conference, 2012
Problems associated with the Auction
Design

Problem 2: Efficiency versus Revenue
 The main purpose of an auction is the efficiency of the
allocation, not the revenue.
 Revenue is just a by-product.
 If you want to promote higher revenue while keeping it efficient,
promote participation.
 Sounded reserve prices are good when there are few
participants.
 Acosta, Elbittar, Carreón and Rivera (2011) found that for each
$1.0 peso obtained by the Mexican Government in the 2010
auction consumers would obtain $8.8 pesos in terms of
economic surplus. Do the math.
Latin American Spectrum Conference, 2012
Problems associated with the Auction
Design

Problem 3: Uncertain value of the object (Winner curse)
 The auction format needs to be useful for “price discovery”.
 Ascending price auction has been a good instrument for that
purpose.

Problem 4: Take advantages of potential complementarities
(Technological and economic complementarities)
 Utility: U(A+B) > U(A) + U(B)
 Allow bidders to define the object to be auctioned off (for
instance, packages)
 Run simultaneous auctions, with package bidding. It helps
aggregating demand.
Latin American Spectrum Conference, 2012
Problems associated with the Auction
Design

Problem 5: Efficient mechanisms are not always politically
convenient (Second price seal-bid auctions are efficient but
politically problematic)
 Use multi-round ascending bid auctions
 Still, there is a risk for tacit collusive behavior

Problem 6: Hoarding behavior
 The best way to stop hoarding the spectrum is to make the
market contestable.
 Promote participation. Reduce the barriers to new participants.
 Increase the cost of hoarding: Keep auctioning more spectrum.
 Actively promote a secondary market for spectrum.
Latin American Spectrum Conference, 2012
Problems associated with the Auction
Design

Problem 7: Withdrawal after winning
 Require an up-front deposit with the possibility of being liable
 Do not renegotiate.
 In case of default, auction it again.

Problem 8: Collusive behavior
 Simultaneous ascending price auctions are open to collusive
behavior
 Give incentives to new participants (tax break)
 Set sensible reserve prices
Latin American Spectrum Conference, 2012
Problems associated with the Auction
Design

Problem 9: Insufficient participation (Entry-deterrence and
predation)
 Give the best information you have to all potential entrants.
 Use English-Dutch auction rule to promote participation of
small bidders: Run an ascending price auction, and make the last
top two bidders bid in a first price auction in a final round.

Problem 10: Bounded rationality
 We all are boundedly rational. It is not personal, it just a fact.
 So try to think ahead and remember: “shoe is on the other
foot”. That is what strategic behavior is all about.
Latin American Spectrum Conference, 2012
Thanks!
Latin American Spectrum Conference, 2012