C15: Economic Policy Analysis

1

• C15 Economic Policy Analysis
• Topic 7 Auctions
• Tilman Börgers
• February 2004

2

• Lecture 1 Spectrum Auctions (23 February)
• Lecture 2 Electricity Auctions (1 March)
• A revised handout is available on the course web
  page.
• General reference Paul Milgrom (1989), Auctions
  and Bidding A Primer, The Journal of Economic
  Perspectives 3, pp. 3-22.

3

• Lecture 1 Spectrum Auctions

4

• References
• Paul Milgrom (2000), Putting Auction Theory to
  Work The Simultaneous Ascending Auction, Journal
  of Political Economy 108, pp. 245-72.
• Ken Binmore and Paul Klemperer (2002), The
  Biggest Auction Ever The Sale of the British 3G
  Telecom Licenses, Economic Journal 112, pp.
  C74-C96.
• Tilman Börgers and Christian Dustmann, Strange
  Bids Bidding Behavior in the United Kingdoms
  Third Generation Spectrum Auction, available at
  http//www.ucl.ac.uk/uctpa01/strange2.pdf .

5

• Outline of the Lecture
• Introduction
• An Overview of 3G Licensing in Europe
• Why Auctions?
• The Simultaneous Ascending Auction
• The UK Experience
• Conclusion

6

• Introduction
• Mobile telephone networks use radio spectrum.
• Spectrum users need permissions (licenses).
• Licenses are issued by a government agency (in
  the UK formerly Radiocommunications Agency, now
  Ofcom).
• Around the year 2000, licenses for the next (3rd)
  generation of mobile telephone networks needed to
  be issued.
• International agreement had specified spectrum
  bands and technology (UMTS).

7

• What needed to be determined
• Number and size of licenses.
• License holders.

8

• The Objectives
• Create sustainable competition in the third
  generation mobile telephone market.
• Allocate the licenses to the right license
  holders.
• Raise government revenue.

9

• The Constraints
• The available spectrum 2x60 MHz of paired
  spectrum and 25 MHz of unpaired spectrum.
• Technological constraints (minimum spectrum 2x10
  MHz paired spectrum).

10

The Methods
Method I Method II Method III
Mechanism by which the Number and Size of Licenses is determined Bureaucratic Bureaucratic Auction
Mechanism by which the License Holders are chosen Bureaucratic Auction Auction
11

• Economic theory makes predictions regarding these
  methods.
• Before the auction Recommendations based on
  theory were made.
• A variety of methods were tried out.
• After the auction Check whether predictions came
  true.
• Our focus will be on the UK.
• But first we give an overview of the European
  picture.

12

• 2. An Overview of 3G Licensing in Europe
• Method I (Beauty Contest)
• Finland, Spain, Sweden, Portugal, France,
  Ireland, Luxembourg
• Method II (Auctions With Exogenous Licenses)
• UK, Netherlands, Italy, Belgium, Denmark
• Method III (Auctions With Endogenous Licenses)
• Germany, Austria, Greece

13
The Results
Country No of Licenses Rev ( ) per head
Method I Finland February 1999 4 0
Spain December 1999 4 15
Sweden September 2000 4 0
Portugal September 2000 4 40
France January 2001 2 168
Ireland March 2002 3 27
Luxembourg March 2002 3 2
14
Country No of Licenses Rev ( ) per head
Method II UK March 2000 5 642
Netherlands June 2000 5 372
Italy September 2000 5 213
Belgium February 2001 3 44
Denmark September 2001 4 96
15
Country No of Licenses Rev ( ) per head
Method III Germany July 2000 6 619
Austria November 2000 6 103
Greece July 2001 3 46
16

• 3. Why Auctions?
• Objective
• Put licenses into the hands of those who value
  them the most.
• ? Allocate licenses so that the sum of valuations
  is maximized.
• Promote competition.

17

• How to maximise the sum of license valuations?
• Identical licenses
• Give to the bidders with the highest valuations.
• Heterogeneous licenses
• More complicated.

18

• Example
• One small license (S), one large license (L).
• Solution A gets S and B gets L.
• Marginal valuations matter!

Bidder Value for S Value for L
A 9 11
B 4 7
19

• Example (continued)
• One small license (S), one large license (S).
• Solution A gets S and B gets L.

Bidder Value for S Value for L
A 9 11
B 4 7
C 5 6
20

• The key problem
• The government doesnt know the valuations.
• The solution
• Auctions.
• Competitive bidding reveals values.
• Competitive bidding maximizes the sum of
  valuations.

21

• 4. The Simultaneous Ascending Auction
• A very rough classification of auctions

Single Unit Auctions Multi-Unit Auctions
Sealed Bid Auctions
Open Bid Auctions x
22

• Open, Multi-Unit Auctions
• The most prominent open, multi-unit auction is
  the simultaneous ascending auction.
• The simultaneous ascending auction is the most
  popular auction format for spectrum auctions.
• It is often attributed to Milgrom, Wilson,
  McAfee,
• Here we study it in the simplest context
  Multi-unit supply, but single-unit demand.

23

• Simultaneous, Ascending Auction Rules
• All licenses are auctioned simultaneously.
• Bidding starts at minimum bids.
• In each round, the currently leading bidders are
  committed to their bid, and cant change it.
• All other bidders have to overbid one currently
  leading bid by a minimum increment, or drop out.
• Bidding continues until the number of active
  bidders number of licenses.
• Bidding on all licenses closes at the same time.

24

• Straightforward Bidding
• Surplus Value of a license Minimum bid.
• Bid for the license for which surplus is
  maximised.
• Bid the minimum bid.
• Theorem
• Straightforward bidding is rational (a Nash
  equilibrium).
• Under straightforward bidding, licenses are
  allocated so that the sum of valuations is
  maximised. (Milgrom, 2000)

25

• Example (continued)
• Bid price of L up to 1.
• C switches to S
• Bid price of L up to 2.
• A switches to S, and then switches back and
  forth.
• When price of S reaches 5, C drops out.
• A wins S and B wins L.

Bidder Value for S Value for L
A 9 11
B 4 8
C 5 6
26

• Why is the Theorem true?
• Straightforward bidding is rational (a Nash
  equilibrium)
• At the time at which a bid is placed, you get the
  highest surplus.
• If prices of other licenses go up, your choice
  looks even better.
• If your bid is overbid, then you can still switch
  on other licenses.

27

• Is it always best to bid straightforwardly?
• Not if the others play a strategy of the type
  Bid the price of license X up, if bidder Y ever
  bids for license X.
• Yes if the others also bid straightforwardly.
• This is why the Theorem only says that it is a
  Nash equilibrium to bid straightforwardly.

28

• Under straightforward bidding, licenses are
  allocated so that the sum of valuations is
  maximised
• Suppose some other license allocation had a
  higher sum of valuations.
• Then also the difference between sum of
  valuations and current prices were higher.
• Then some bidder would have to have a higher
  surplus in the new allocation.
• Why did this bidder not bid for this license?

29

• 5. The UK Experience
• I focus on the case of the UK.
• There were five licenses 2 large ones (A and B),
  and 3 small ones (C, D and E).
• The 4 incumbents were not allowed to bid for A.
• There were 13 bidders.
• 6 March 2000 - 27 April 2000.
• 150 rounds.

30

• The Winners
• Incumbents in red

Licence Company Winning Bid
A TIW 4,384.7 m
B Vodafone 5,964.0 m
C BT3G 4,030.1 m
D One2One 4,003.6 m
E Orange 4,095,0 m
31

• The Losers

Company Withdrew in Round
NTL Mobile 150
Telefonica 133
Worldcom 121
One.Tel 100
Epsilon 98
Spectrumco 97
3GUK 95
Crescent 94
32

• Our main question
• Did bidders reveal consistent marginal
  valuations?
• Under straightforward bidding bid for large
  license if
• vL-pL gt vS-pS ?
• pL-pS lt vL-vS
• Valuation differences should be revealed by bids.

33
(No Transcript)
34
(No Transcript)
35
(No Transcript)
36
(No Transcript)
37
(No Transcript)
38

• Possible Interpretation of BTs Behaviour
• Naïve rule of thumb (minimize /MHz)
• Easy to justify towards shareholders.
• Drive up the price that Vodafone has to pay.

39
(No Transcript)
40

• Possible Interpretation of TIWs Behaviour
• Strategy change after the first phase.
• Tried to conceal their true identity in phase 1.

41
(No Transcript)
42

• Possible Interpretation of NTL Mobiles
  Behaviour
• Learning in the first phase.
• Budget constraints in the last phase.

43

• 6. Conclusion
• More research is needed to understand bidders
  motivation structure in license auctions.
• The outcome of the UK auction might have been
  efficient
• but not for the reasons we expected.
• Auction designs need to be tested further.

44

• Open Questions
• Do we need to license use of the radio spectrum
  (Open Spectrum Movement)?
• Should licenses specify the use that is made of
  the spectrum?
• Should we allow trade in licenses?
• Should license trade be regulated?
• How does trade in licenses affect bidding in
  license auctions?
• Do customers get a good deal when firms have to
  pay high license fees?