I was wrong a few weeks ago when I wrote, “While the FCC has sponsored research and considered deployment [of package bidding and combinatorial auctions], so far they have been dissuaded by the complexity of the auction design and opposition from commenters.” The FCC has tried package bidding once before, in 2003, when it auctioned six regional narrowband PCS licenses in the 900 MHz band. It wasn’t much of a test of combinatorial auction designs, however: only two bidders participated in the auction, and the FCC sold only five of the six licenses offered.
Much more interesting is the limited package bidding to be allowed in the auction of 700 MHz spectrum scheduled to begin January 24. This is the auction that has attracted the interest of Google along with just about every wireless company out there. (Wired reports on why the auction is such a big deal.)
One piece of the 700 MHz spectrum being offered, the “C Block,” is attracting the most interest, and it is the block that the FCC is offering under new “Hierarchical Package Bidding” (HPB) rules. HPB is a complicated name, but it is a pretty simple idea. In effect, the FCC is offering two ways to bid on the 12 regional C Block licenses: companies can submit individual bids on one or more of the 12 licenses, and companies can submit bids on three super-regional packages of licenses. The most interest will likely be in the package containing regional licences 1-8, covering the fifty U.S. states. (The other four licenses are divided into an Atlantic package, covering Puerto Rico, the U.S. Virgin Islands and the Gulf of Mexico, and a Pacific package, which covers U.S. Pacific territories.)
The HPB rules emerged from the experimental auction design work of Charles Holt and Jacob Goeree while they were testing a variant of the FCC’s simultaneous multi-round auction rules that permitted package bidding. (See links below.) Relatively poor performance of the FCC’s package bidding auction design led Holt and Georee to examine alternative approaches, and they eventually developed and tested the HPB design.
Various experimental tests examined the FCC’s standard simultaneous mult-round ascending auction, the FCC’s variant SMR with package bidding, an approach called RAD, the combinatorial clock design, and the HPB design that Holt and Goeree proposed as an alternative. In accepting the HPB, the FCC said:
[W]e will use HPB in part because the mechanism for calculating [prices] is significantly simpler than other package bidding pricing mechanisms. … In addition, we find that . . . HPB procedures in general strike a careful balance between permitting bidders adequate bidding flexibility and discouraging insincere and anticompetitive bidding behavior.
The design has been developed and tested in the economics lab. We are about to see how well it performs in practice.
NOTES: The FCC provides much more information on the 700 MHz auction online. I extracted the FCC quoted material from a Caltech press release that also has comments from Goeree and additional commentary. The results of the tests have been presented in numerous reports authored by Goeree, Holt, and others: