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3G Spectrum: How to run a good auction

By Darshit Shah
October 13, 2007 10:34 IST
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The TRAI recommendations on the allocation of 3G spectrum in September 2006 try to answer two questions. First, what is the best method for the allocation of spectrum and second, which operators should be considered for the same?

In answering the first question, we found that the two most popular methods for spectrum allocation are beauty contests and auctions. In beauty contests, participants are awarded licences based on certain financial as well as qualitative parameters. The problem here is that the evaluation would be based on subjective criteria and the promise of future performance.

Additionally, this is not a transparent process. We believe that auction methods are superior to non-auction methods, as they help in the allocation of spectrum to those who value it the most, give maximum revenue to the government and ensure transparency.

Though single-bid auctions are the best form to avoid collusion, the bidding process does not allow information exchange and efficient price discovery. In multi-stage auctions, each block of spectrum in a circle is allocated in separate auctions. This again restricts information availability and hampers price discovery. In a simultaneous ascending auction (SAA), all spectrum blocks are auctioned simultaneously in a single auction. The auction is conducted in multiple rounds.

This ensures efficient price discovery. Additionally, the bidder is selected through transparent market mechanisms only. It also allows for superior aggregation when licenses of more than one circle are auctioned simultaneously. It has proved successful in the US and European countries.

In India, "4th Telecom Operator" licences in various circles as well as FM Radio licenses were awarded through SAA.

The TRAI has also recommended SAA, but some parameters of the auction have been changed. The key differences with the model adopted by the Federal Communications Commission in the US are:

All bid prices are not revealed at the end of each round, thus defeating the tenet of providing maximum information for price discovery.

The TRAI is yet to specify detailed rules on bid increments, activity rules, frequency of rounds and so on, which would play a role in reducing the collusion and efficiency of auctions.

Further, since there is a possibility of signaling through the bidding values itself, the bid increments should be made in round numbers only. The parameters in an auction design interact in a complex manner to ensure an efficient allocation. Therefore, any change in the standard model of an auction should be done only after careful analysis. Any mismatch in parameters can reduce auction efficiency considerably.

Hence, we suggest that the government adopt SAA without changing the parameters of auction design unless backed by detailed studies.

The other question is whether the 3G spectrum auction should be opened up for new players or not. The TRAI has recommended that only existing players be allowed to bid. The supporting reasons for this argument are economies of scale for existing players, and the fact that many licensees are yet to get their promised spectrum allocation. The competing philosophy demanding the entry of new players is grounded in the stated objective of the TRAI which is "to promote competition and ensure a level playing field."

If new players are not allowed, it might lead to competition restricted to existing players and will hamper growth and consumer interest. We also propose that the factors mentioned for restricting new players like economies of scale would get factored in the bids, and finally, the player who assigns the maximum value for the spectrum will bid the highest and win. Similarly, the players who have been awarded licences but not spectrum should get spectrum only if their current valuation of spectrum is more than the competition's.

Hence, we recommend that all players including new players be allowed to participate in the auctions.

Additional reporting with Deepa N Swamy, Rashmi Rammohan, Vikrant Bahl
The writers are students at the Indian Institute of Management, Bangalore.

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