Why auctions?

I spent some time over the last few days trying to understand how we got in the position of auctioning off airwaves that have been painfully wrested from the broadcasters (who would rather eat their children than give up on spectrum) to the highest bidder.

The plan is that the auction could net about $15 billion.  That's about what the US spends each month on the Iraq war.  So it's not a lot.

In exchange for this, most pundits are saying the rules floated by Chairman Martin will almost inevitably end up with the current wireless incumbents winning the auction.  That's a big loss on a number of vectors – these auctions began in the Clinton era with the grand hope of a brand new telecommunications sector, full of upstarts and new forms of data transmission that would catapault the US into the future.  (You should read the speeches!  I'll dig some up for you in future posts.)

It's also a big loss for the “public interest” that the auction should, by law, be serving.  Congress has said pretty clearly that the auction is supposed to promote economic
opportunity and competition and ensure new and innovative technologies are accessible;
to avoid concentration; and to note the interests of small businesses.  None of that will happen if the incumbents win.

The other tradeoff, of course, is the unknown richness of innovation that could be unleashed if we did things differently.  Just look at everything that happened with 802.11 — all that — who could have known?

Comparative hearings didn't work, lotteries were a nightmare, and we seem to be lurching towards an auction with deeply political assumptions embedded in the rules. But I'm trying to be optimistic.  There's still time for things to change.  The Carterfone ideas (no locking of devices to networks, no blocking of applications) are just great, and we're all waiting to see how that comes out in actual language.  The public interest can be served in an auction, if the rules are set up the right way.


  1. Anonymous says:

    In classical market theory, an auction would serve not only to generate money for the federal government, but would create the highest probability that the scarce spectrum resource would be used at maximum efficiency, because presumably the entity with the greatest expected return will bid the most — and classical market theory assumes the greatest return is the same as the most efficient use, in the long run, for the public as a whole. Of course you are, appropriately, suggesting market failures for which purely classical theory doesn't account (such as, an incumbent provider gobbling up bottleneck facilities to exclude competition that might otherwise have expanded efficiency), but that may nonetheless be enormously important. My only point is to be careful not to underestimate the arguments in favor of the auction method as being just about maximizing revenue for the Treasury: the emphasis on the auction is also typical pure-market thinking.

  2. Anonymous says:

    You're right, Bruce, and there have been many very strong articles on this pure-market point over the years. Thanks for the comment. Susan


  1. [...] others believe that the auction approach is itself a giveaway to the largest wireless companies. They predict that [...]