Silence and the spectrum auction

The recently concluded 700MHz spectrum auction in the US has been in the news a lot lately. Everybody is talking about how Google “won” despite having lost . An interesting aspect of the process was that the bidders were forbidden from talking about the auctions until they concluded. In this post, I shall try to explain why it was important to enforce this rule of silence.

The 700MHz band is being opened up for use by Wireless Internet Access Providers (WISPs) to provide the US consumers with a third way (phone and cable being the first two) to have broadband access to the Internet.

The FCC has been auctioning licenses for blocks of spectrum since 1994. The designs of the auctions in the past have used the latest developments in economic theory. In fact, much of the development in the theory of auctions has been influenced by the results of the FCC auctions. The advisers to the FCC have included people such as Peter Cramton and groups such as Public Interest Spectrum Coalition(PISC). You can read Cramton’s testimony to the Senate budget committee here, in which he explains the successes and failures of previous FCC auctions. He says:

FCC auctions have used a simultaneous ascending design in which groups of related licenses are auctioned simultaneously over many rounds of bidding. In each round, bidders submit new higher bids on any of the licenses they desire, bumping the standing high bidder. The auction ends when a round passes without any bidding; that is, no bidder is willing to raise the price on any license. As one license gets bid up, a bidder can shift to an alternative that represents a better value. In this way, bidders are able to arbitrage across substitutable licenses.

This auction seemed to work successfully and in Cramton’s own words, the revenues “exceeded industry and government estimates.” However, there were still problems with this design. PISC published papers in which they point out a couple of ways in which big incumbent companies (typically, monopolies and duopolies) can act so as to limit competition. They described two such strategies.

In the first strategy of “blocking bidding“, incumbents bid on licenses to deny licenses to new entrants even though they didn’t want them. Since the identity and the bid amount of each bidder was known to all other bidders, new entrants could be singled out and targeted by groups of incumbents. This strategy was quite successful. The incumbents were able able to deny any spectrum to all but two of the new entrants.

The second strategy that the incumbents used was “retaliatory bidding“. In this strategy, an incumbent goes into an auction with a set of licenses in mind. If a new entrant tries to bid on any of the licenses in this set, it is “punished” by the incumbent. The incumbent places high bids on the other licenses that the new entrant wishes to acquire. These bids are not meant to win. They are meant to increase the amount the new entrant has to pay for its licenses. The incumbent signals to the new entrants that it will not tolerate any bids on the licenses it (incumbent) wishes to acquire. The new entrants back off and the incumbents pick up what they want at a low price.

The PISC recommended that that the FCC make one important change to the design – make it anonymous. In this kind of auction, bidding is still simultaneous and carried out in multiple rounds. Bidders know only the highest bid at the end of each round, but not the identity of the bidder. It is easy to see that this design tackles both the blocking bidding and the retaliatory bidding problems. The FCC adopted this change when it auctioned the 700 MHz spectrum. The rule of silence was necessary to ensure that the identity and strategy of the bidders was not known to the others.