Monday, May 28, 2007

Will The Failure of FCC Spectrum Auctions Impact 700 MHz?


According to this May 2006 paper from the Center for American Progress (quote) "The Federal Communications Commission’s auctioning of spectrum licenses is a failure. The auctions have been subject to collusion and manipulation by big business, and as a result have failed to meet legislative guidelines." (end quote)

(Quote) "Analysis of the last ten years of FCC spectrum auctions reveals that these auctions have met neither the standards nor the expectations expressed by Congress in their authorization. They do not facilitate the development of robust markets or meet the needs of the broader public interest. Instead these auctions, as they have been conducted, appear to serve the narrow interest of dominant actors in the telecommunications industry. They have systematically resulted in market concentration and the growth of the oligopolistic market power of major actors in the telecommunications industry. They have been pervious to manipulation by tacit collusion among bidders in ways which no minor amendment of the auction process could possibility remedy. Even the often made argument that FCC spectrum auctions maximize revenue fails in the face of both FCC mispricing of licenses, reflected in the large number of licenses which fail to be auctioned because no bidder meets the reserve price, and substantial evidence that strategic behaviors like preemptive bidding can guarantee better capitalized bidders licenses at consistently lower prices than their competitors. What has principally driven the adoption of spectrum auctions by the FCC and Congress has been ideologically-libertarian economic theory, captured in simplistic models which ignore inconvenient facts. Game theory is a powerful tool for analysis of economic behavior. However, a game-theoric model is only as good as its assumptions. Assumptions about information, bidder resources, risk-acceptance and -aversion, and the structure of bidder preference all matter, because they imply things about how the real world operates. All modeling is along a continuum between analytical tractability and empirical verisimilitude: the more mathematically tractable the model is, the less it resembles the real thing being modeled. It is for this reason that social scientists frequent evaluate and refine such models through experiments to see whether an analytically tractable model captures what really matters about the thing it models. The past ten years of FCC spectrum auctions have amounted to such an experiment, and the experiment demonstrates that the models on the basis of which Congress and the FCC were persuaded to adopt spectrum auctions fail dramatically in their prediction of real-world outcomes. When tested by the actual performance of such auctions, the chasm between the outcomes predicted by theory and the outcomes observed is immense. In sacrificing the public interest in pursuit of hypothesized market efficiencies and greater revenue we have arrived at the worst of both worlds: FCC spectrum auctions neither serve the public interest nor realize the promised economic efficiencies and revenue maximization touted by their advocates." (end quote)

(Quote) "Until the FCC can demonstrate that it can conduct auctions in the public interest, Congress should halt the ongoing plans to auction licenses to the public spectrum." (end quote)

Kinda makes one question just how small business entrepreneurs, women, minorities, and public safety/first responders will fare in the up-coming - and perhaps most important auction of all - that of the 700 MHz spectrum.


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