David Porter and Vernon Smith have put together an assessment of the FCC’s 12 years of experience with spectrum auction design, forthcoming in the Journal of Law Economics and Policy. From the introduction:
Recent policy discussions regarding broadband Internet access have revived debates about various methods for allocating electromagnetic spectrum rights and the appropriateness of spectrum auctions. Debates over the assignment of spectrum rights via auction are hardly new. Economists have long argued that auctions would promote efficiency… Still, auctions have attracted vigorous opposition from defenders of traditional “public interest” licensing… When this market-oriented approach was actually implemented in the United States in the early 1990s, these debates ceased being purely theoretical. Twelve years of actual experience with spectrum auctions now allow us to look back and assess what lessons can be learned from the adoption of this approach.
The paper provides a focused, non-technical look at market design issues that have arisen as the FCC implemented a 1993 federal law permitting spectrum auctions. Many of the “best and brightest” among auction economists have participated in the research and analysis of the FCC’s auction design proposal. Perhaps not surprisingly, auction theory didn’t contain an answer for every broad design issue or narrow auction implementation task that came along. As a result, there has been a lot of trial-and-error and learning along the way.
Porter and Smith are experimental economists, and their writing is heavily informed by their background. After assessing some “unexpected” strategic behaviors in early auctions – jump bidding, parking, retaliatory bidding, and various other signaling games – Porter and Smith note that the “behaviors observed in these auctions may have been surprising to the FCC and some economists, but they had been observed many times in laboratory experiments.”
The article then turns to a discussion of “new, untested rules” imposed by the FCC in the attempt to curtail strategic bidding and speed up auctions, and two areas of current interest: information policy and package bidding. Information policy concerns how much information about other bid and bidders during the course of the auction. Generally, the more information disclosed, the more effort bidders will put into strategic bids – often to the detriment of auction efficiency and seller revenue. The FCC proposed a strict “no information” policy for the Advanced Wireless Services auction, a position endorsed by the FTC and Department of Justice, but then decided to reveal all information if certain (easily met) conditions were in fact met. (They were.) Porter and Smith remark that information policy can be tested in the lab.
Package bidding, which requires a combinatorial auction design, gives bidders tools to bid for just the combinations of licenses desired, something complicated or impossible to do in the FCC’s standard simultaneous ascending auction design. Package bidding can be particular valuable in spectrum auctions because depending upon a bidder’s business strategy and existing resources, any one license may be either a complement or substitute for other licenses being offered. Both Smith and Porter (among others) have long advocated use of combinatorial auctions for the sale of spectrum. While the FCC has sponsored research and considered deployment, so far they have been dissuaded by the complexity of the auction design and opposition from commenters. [See UPDATE, below.] (Combinatorial auctions have been used by others, see the citations in the articles for examples.)
A sort of motto or theme that permeates the work of economists involved in experimental testing of market designs is, in effect, “You can pay a little, and learn from your mistakes in the lab, or you can pay a lot when you learn from your mistakes in the field.” While Porter and Smith don’t quite state the idea outright, it is fundamental to their outlook. In fact, the idea is embedded in their title, “FCC Spectrum Auction Design: A 12-year Experiment.” The FCC hasn’t avoided testing their auction design ideas in experiments, it is just that they have chosen to experiment in high-stakes, hard-to-control, live action auctions with billions of dollars of resources at stake. How many resources have been wasted in the FCC’s 12 years of poorly controlled experiments?
Of course, the auctions, even if not as efficient as they could be, are vast improvements over allocation by government fiat or allocation by lottery, the approaches auctions have replaced.
Porter and Smith say, “a fresh reexamination of the FCC auction design protocols is overdue,” and they suggest a few criteria: reduce participation costs to bidders, make it easier to assemble desired packages, and minimize incentives for strategic behavior. And, of course, “Whatever the proposed redesign, it should be thoroughly tested first in the laboratory.”
UPDATE: I was wrong, the FCC hasn’t been dissuaded completely from trying package bidding, as I explain in a January 2008 post, the FCC tried package bidding in a small way in 2003 and is about to try a new package bidding design in the big 700 MHz auction. See that post for additional detail and links.