Auction

Question 1

How were 2g mobile phone licenses awarded?

Answer 1

Beauty contest, firms submitted business plans to a government committee which awarded the licenses to those candidates it judged best met a set of published criteria

However, the US FCC success in auctioning licenses raising $20bn inspired the UK government

Question 2

Arguments for Auctioning?

Answer 2

A well-designed auction is the method most likely to allocate resources to those who can use them most valuably

Auctions can extract and use information otherwise unavailable to the government

Beauty contests are time-consuming and are subject to political controversy

An Auction can raise staggering amounts of money to support public finances - The UK 3G auction yielded about 2.5% of GNP, or enough money to build 400 new hospitals

Question 3

Reservations

Answer 3

Companies are taking huge risks in bidding in an auction

Perception that the winners of the UK 3G auction overpaid

Price effects: firms cost in an auction will be passed onto a consumer?

Large auction fees may slow investment because of capital-market constraints

Question 4

Aims of the 3G Auction?

Answer 4

1. To assign the spectrum efficiently
2. To promote competition
   - permitting no bidder to hold more than one license
   - auctioning the maximum number of licenses given the available spectrum
3. to realise the full economic value - raise revenue

NB: Promoting efficiency involves raising revenue

Question 5

Outcome?

Answer 5

The four incumbents won licences, with Vodafone paying about £6 billion ($9 billion) for licence B, compared with the £4 billion ($6 billion) or so paid by the other incumbents for each of licences C, D and E.

The reserved licence A was taken by the entrant TIW (largely owned by Hutchison Whampoa) for about £4.4 billion ($6.6 billion).

Raised over 22 bln pounds!

Question 6

Other Auctions

Answer 6

Later European 3G auctions suffered from various problems – in particular, firms’ formation of joint-bidding agreements once they had seen how costly the competitive UK auction was.

The Turkish government auctioned licences A and B sequentially, but set the reserve price for licence B = to the price at which licence A was sold. One company then bid much more for A than the market thought it could be worth if the company had to compete with a rival holding B. But the company had rightly figured that no rival would be willing to bid that high for B, which therefore remained unsold, leaving the company without a rival!

Question 7

Lessons Learnt

Answer 7

When planning an auction, the government should keep in mind:
No one-size-fits-all solutions
Facilitate entry
Carefully think through and test the rules (reserve prices, collusion)
Market structure

Question 8

Modern day auctions

Answer 8

5G Auction prices paid

1.4bn
Vodaphone paid - £378M
O2 - £318m
EE -£303