Introduction to auctions and market structure:

1
Introduction to auctions and market
structure UMTS-case
Univ. Prof. dr. M.C.W. Janssen March 2, 2009
2
Areas where allocation decisions are needed

• Radio frequency bands

• Gasoline stations along highways

• Bus companies / ambulance services

• Airports (slots)

• Entrance to medical school

• Coffeeshops

3
Choosing a private company in a market environment

• Two stages
• Aftermarket (monopoly, oligopoly prices,
  quality, information asymmetry)
• How to choose private firms?
• Auctions
• Beauty Contest
• Lottery
• Grandfather rights
• Valuable Objects? License is scarce. Why?

4
Content today

• UMTS auctions - background - outcomes in
  Europe

• lessons for other cases
• What, How Many, When to Allocate?
• What to Allocate Which allocation mechanism?
• Which issues come up?

5
UMTS Auctions
Rev./capita ()
UK
April 2000
38.475
655
Netherlands
July 2000
2.68
175
Germany
Aug. 2000
50.8
620
Interest (5 ) 320 mln per year
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Technical background (1)

• Paired vs. Unpaired frequency bands

• Units of 5 MHz

• Minimum spectrum requirement
  2 x 10 MHz (paired)

• Preferred spectrum requirement
  2 x 15 MHz (paired) 5 MHz (unpaired)

• Available frequency bands 2 x 60 MHz
  (paired) 25 MHz (unpaired)

• Possible number of blocks 4, 5 or 6

7
Technical background (2)

• Parts of GSM network can be used for UMTS
  network incumbents have lower costs for
  developing network

• Technical possibility of using each others
  network

• Roaming access to a network one does not own

8
Market background
Netherlands

• 5 Incumbent operators (two large, three small)

• only 1 new player entered the auction

9
Possible government goals

• Create a competitive, innovative market

• Allocate licenses to the most efficient companies

• Maximize revenues / Optimize revenues

• Are these Goals Consistent?

10
Different notions of efficiency

• Market Efficiency TS CS PS
• Efficient firms cost efficiency
• Operating cost?
• Including entry cost?
• Asymmetry entrant/incumbent
• Efficiency of allocation mechanism object(s)
  gets in the hands of those players who value them
  the most

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Auction vs. Beauty Contest (1)
Auction
Beauty Contest
UK Netherlands Germany Italy Austria Switzer
land Belgium Denmark
Finland Spain Norway Sweden Portugal Ireland Franc
e
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Difference between Auction and Beauty Contest

• Players bid in both mechanisms
• Players qualities can be assessed in both
  mechanisms possibly ex ante
• In Beauty Contest, money is not part of the bid?
• In Auctions, only monetary bids?
• Once Auction design is fixed, subjective
  judgments do not play a role (algorithm).
  Subjectivity essential to B.C.

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About a players value

• How is the value determined?
• Discounted sum of Future Profits
• Private knowledge, although
• Even uncertain for firms themselves
• Value revelation can we infer values from
  bidding behaviour?
• Ex. English auction
• Efficiency of mechanism do players win who have
  highest value?
• Ex. Sealed-bid auction
• What is a players value if multiple licenses are
  auctioned?

14
UMTS-auction designs choices
UK
Germany
Netherlands
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Outcome United Kingdom

• Orange
• One2One (Deutsche Telekom)

• Vodafone
• BT Cellnet

New entrants

• NTL (a.o. France Telecom)
• TIW (Canada)

• Telefónica
• Worldcom
• 5 earlier dropouts

• Largest license to new entrant TIW

16
Outcome Netherlands

• Dutchtone
• Ben
• Telfort

• KPN
• Libertel (Vodafone)

New entrant
- Versatel

• 2 largest incumbents win largest licenses

• Telfort sent a letter to Versatel threatening
  legal action if Versatel continued to bid

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Outcome Germany
- Mannesmann (Vodafone) - Viag Interkom (British
Telecom)
- E-Plus (KPN Hutchison) - T-Mobil (Deutsche
Telecom)
New entrants
- Debitel
- Mobilcom (France Telecom) - 3G (Telefónica
Sonera)

• Bidding continued after Debitel dropped out,
  trying to push another company out of the auction

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What went wrong in the Netherlands?

• Auction design almost no entry in auction

• Goals were not clearly formulated

• They thought they knew

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Other issues

• How to guarantee entry?

• Collusion? (Construction Sector auction of
  houses)

• Political problems
• Lobbying for certain mechanism
• Lobbying for favorable auction/B.C. format

• Credibility of the rules
• - Should each firm have their own network?
• Should firms pay what they bid (or on time)?
• Universal Service Obligation? Starting Date?

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Conclusions

• Issues are more complicated than they at first
  seem
• How many licenses to allocate?
• How is license defined? (determines market
  behaviour)
• Which mechanism to use?

• Large interests at stake possibility of
  lobbying (especially problematic in small
  countries like the Netherlands, Austria)

• More use of auctions in the future is likely