Spectrum Auction Design p g Peter Cramton* Professor of - PowerPoint PPT Presentation

Spectrum Auction Design p g Peter Cramton* Professor of Economics, University of Maryland P f f E i U i it f M l d 23 April 2009 *I thank my collaborators, Larry Ausubel and Paul Milgrom for helpful discussions, as well as Robert Day, Evan Kwerel, Thayer Morrill, Nate Higgins, and Andrew Stocking. I thank the staff at Ofcom, especially Graham Louth, Director of Spectrum Markets, whose leadership and Graham Louth, Director of Spectrum Markets, whose leadership and intellectual contribution were essential to the successful implementation of the package clock auction. I am grateful to the National Science Foundation and the Rockefeller Foundation for funding.

Market design Market design • Establishes rules of market interaction Establishes rules of market interaction • Economic engineering – Economics E i – Computer science – Operations research O • Applications – Matching – Auctions (matching with prices)

Market design fosters innovation Market design fosters innovation • Improving price information Improving price information • Enhancing competition • Mitigating market failures Miti ti k t f il

Applications Applications • Emission allowance auctions Emission allowance auctions • Airport slot auctions • Spectrum auctions S t ti • Electricity and gas markets • Global financial crisis • Green energy projects Green energy projects

Introduction Introduction • Auction design Auction design – Government perspective (design) – Bidder perspective (strategy) Bidder perspective (strategy) • Based on my experience – Researching auctions – Advising governments (12) – Advising bidders (31)

Application: Spectrum auctions Application: Spectrum auctions • Many items, heterogeneous but similar Many items, heterogeneous but similar • Competing technologies • Complex structure of substitutes and • Complex structure of substitutes and complements • Long-term market • Long term market • Government objective: Efficiency G t bj ti Effi i – Make best use of scarce spectrum • Recognizing competition issues in downstream market • Recognizing competition issues in downstream market

Main points Main points • Enhance substitution Enhance substitution – Product design – Auction design Auction design • Encourage price discovery – Dynamic price process to focus valuation Dynamic price process to focus valuation efforts • Induce truthful bidding – Pricing rule – Activity rule y

Simultaneous Simultaneous ascending auction ascending auction

Simultaneous ascending auction Simultaneous ascending auction • Simultaneous Simultaneous – All lots at the same time • Ascending Ascending – Can raise bid on any lot • Stopping rule – All lots open until no bids on any lot • Activity rule – Must be active to maintain eligibility g y

Simultaneous ascending auction Simultaneous ascending auction • Strengths g – Simple price discovery process – Allows arbitrage across substitutes – Piece together desirable packages g p g – Reduces winner’s curse • Weaknesses – Demand reduction Demand reduction – Tacit collusion – Parking – Exposure Exposure – Hold up – Limited substitution – Complex bidding strategies Comple bidding strategies

Limited substitution: US AWS 90 MHz, 161 rounds, $14 billion 90 MH 161 d $14 billi US AWS band plan: something for everyone 1710 1720 1730 1740 1755 A B C D E F Uplink Bandwidth 20 MHz 20 MHz 10 MHz 10 MHz 10 MHz 20 MHz Partition Partition Small Small Medium Medium Medium Medium Large Large Large Large Large Large Regions 734 176 176 12 12 12 A B C D E F Downlink 2110 2120 2130 2140 2155

AWS price for 10 MHz by block 734 CMAs A B 176 EAs C C Day 3 8 D 6 REAGs E F A B Day 4 C 12 D E F A B C Day 5 16 D E F A B Stage 2 C 31 D E F A 40% discount B Final C 161 D E F F 0M 100M 200M 300M 400M 500M 600M 700M 800M 900M 1000M 1100M 1200M 1300M 1400M 1500M 1600M 1700M 1800M 1900M 2000M 2100M High Bids per 10 MHz Sum of pwb amount per 10 MHz for each block broken down by round. Color shows details about pw_bidder. Size shows details about license_size_mhz. The view is filtered on pw_bidder and round. The pw_bidder filter excludes . The round filter keeps 8, 12, 16, 31 and 161. license_size_mhz 10 20

Limited substitution: 700 MHz 62 MH 62 MHz, 261 rounds, $19.6 billion 261 d $19 6 billi Block A B C Bandwidth 12 MHz 12 MHz 22 MHz Type paired paired paired Partition Partition 176 176 734 734 12 12 Price $1.16 $2.68 $0.76 AT&T Verizon Verizon and AT&T won 85% of spectrum

A better way A b tt

Needed enhancements Needed enhancements • Anonymous bidding Anonymous bidding • Generic lots • Package bidding with clock P k biddi ith l k – Porter-Rassenti-Roopnarine-Smith (2003) – Ausubel-Cramton (2004) – Ausubel-Cramton-Milgrom (2006) • “Second” pricing • Revealed preference activity rule Revealed preference activity rule

Package clock auction Package clock auction • Auctioneer names prices; p bidder names package – Price adjusted according to excess demand – Process repeated until no excess demand Process repeated until no excess demand • Supplementary bids – Improve clock bids – Bid on other relevant packages • Optimization to determine assignment/prices • No exposure problem (package auction) • No exposure problem (package auction) • Second pricing to encourage truthful bidding • Activity rule to promote price discovery y p p y

Example: AWS done right Example: AWS done right Task • 90 MHz paired spectrum; nine 2  5-MHz lots p p ; Rule making Rule making • Geographic partition: 176 Economic Areas • Clock stage Preference elicitation elicitation – FCC announces 176 prices FCC 176 i – Each bidder selects best package – Prices rise where excess demand – Continues until no excess demand • Supplementary bids Optimization • Generic assignment; options for specific Generic assignment; options for specific assignments (contiguous, min border issues) Preference • Top-up bids elicitation • Specific assignment Specific assignment Optimization

US AWS-3 US AWS 3 • Two band plans proposed for Two band plans proposed for 2020-2025 MHz and 2155-2180 MHz – TDD (unpaired) Five 5-MHz nationwide lots TDD (unpaired) Five 5 MHz nationwide lots – FDD (asymmetric paired) One 5-MHz paired with five 5-MHz lots with five 5 MHz lots • Should FCC offer paired or unpaired spectrum? LTE or WiMAX? spectrum? LTE or WiMAX? • Better solution: Let auction decide!!

spectrum auctions spectrum auctions UK UK

UK auctions UK auctions  10-40 GHz: fixed wireless or backhaul 10 40 GHz: fixed wireless or backhaul  L-Band: mobile broadcast • 2 6 GHz: 4G mobile wireless (summer’09) • 2.6 GHz: 4G mobile wireless (summer 09) • Digital Dividend: 4G, mobile TV, DTT (’10) R Requirements i t • Technology neutral • Flexible spectrum usage rights • Efficient assignment

UK 2 6 GHz auction proposal UK 2.6 GHz auction proposal • 190 MHz (38 lots of 5 MHz) 190 MHz (38 lots of 5 MHz) • How much paired vs. unpaired? CEPT band plan from Electronic Communications Committee Decision (05)05 Type Paired (FDD uplink) Unpaired (TDD) Paired (FDD downlink) Lot 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 Frequency 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5