**PUBLIC NOTICE**![](media/image1.png){width="0.6541666666666667in"
height="0.6604166666666667in"}

**Federal Communications Commission**

**445 12th St., S.W.**

**Washington, D.C. 20554**

**DA 00-2404**

#  November 2, 2000

## AUCTION OF LICENSES IN THE 747-762 AND 777-792 MHz

## BANDS SCHEDULED FOR MARCH 6, 2001

## COMMENT SOUGHT

ON MODIFYING THE CALCULATION FOR DETERMINING MINIMUM

ACCEPTED BIDS AND CHANGING THE PROVISIONS CONCERNING

"LAST AND BEST" BIDS

**Report No. AUC-00-31-I (Auction No. 31)**

On July 3, 2000, the Wireless Telecommunications Bureau ("Bureau")
announced the procedures for implementing package bidding for Auction
No. 31.[^1] After further analysis and testing, we have determined that
it may be appropriate to make further refinements: (i) to the
calculation for determining minimum accepted bids; and (ii) to the
provisions that allow a bidder that wishes to drop out of the auction to
have an opportunity to make "last and best" bids on licenses and
packages.

**I. Calculation for Determining Minimum Accepted Bid**

With regard to determining minimum accepted bids, we adopted the
following three-part calculation: The minimum accepted bid for any
license or package will be the greatest of: (i) the minimum opening bid;
(ii) the bidder's own previous high bid on that package plus x%, where
the Bureau will specify the value of x in each round; or (iii) the
number of bidding units for the license or package multiplied by the
lowest \$/bidding unit on any provisionally winning package in the last
five rounds.[^2]

We initially adopted part (iii) of the formula so that bids have a
reasonable chance of becoming part of the provisionally winning set and
because it was simple to implement for the then-scheduled auction date
of September 6, 2000. Based on our initial experimental testing, we are
concerned that part (iii) of the minimum accepted bid formula may not be
sufficiently refined to discourage parking strategies, which could
excessively delay the completion of the auction.

Several commenters --- Rakesh Vohra and Robert Weber,[^3] Aleksandar
Pekec and Michael Rothkopf,[^4] and Paul Milgrom[^5] --- in responding
to the *Auction No. 31 Package Bidding Comment Public Notice*,[^6]
suggested an alternative approach to determining minimum accepted bid
amounts, which they claimed would be more likely to ensure serious bids
and help address the threshold problem. This approach would allocate
among non-provisionally winning bids the total increase in revenue
needed to tie the provisional winners. Milgrom defines the "shortfall"
associated with a license or package as the difference between the
revenue of the provisionally winning bid set and the maximum total
revenue associated with the set of bids that includes that particular
license or package.[^7] He defines the "deficit" for the license or
package as the shortfall multiplied by that package or license's
proportion of the \[non-provisionally winning\] bidding units.[^8] In
other words, the deficit is an allocation of the shortfall to the
particular license or package in proportion to its share of bidding
units relative to those associated with bids that were not part of the
provisionally winning set, but are part of the set that maximizes
revenue when including the particular license or package. Milgrom
suggests that the minimum acceptable bid should be the greater of 50% of
the deficit or the bidder's own previous high bid on that package plus
x%.[^9] Alternatively, Pekec and Rothkopf propose allocating the
shortfall in proportion to the bid amounts instead of the bidding units.
Pekec and Rothkopf would permit bids at less than this amount but would
only give activity credit for such a bid if it was the highest bid for
that license or package.[^10]

We propose to replace part (iii) of the minimum accepted bid formula
with a percentage of the deficit as defined by Milgrom because it better
approximates the amount of a bid that could become part of the
provisionally winning set. We propose to set the percentage initially at
100 percent. We would retain the discretion to adjust the percentage of
the deficit during the course of the auction to provide control over the
pace of the auction. We believe that allocating the shortfall according
to bidding units as opposed to bid amounts reduces the risk that bidders
might attempt to bid up the prices of licenses or packages they do not
wish to acquire in order to increase the share of the shortfall
allocated to those licenses or packages. We seek comment on this
proposal.

To account for the possibility that there can be more than one set of
bids that yields the same shortfall for a given bid, we propose to
choose the shortfall set that includes the most provisionally winning
bidding units. Once such a shortfall set is determined, the deficit for
the bid of interest is determined by multiplying the shortfall by the
ratio of bidding units associated with the bid to the total
non-provisionally winning bidding units in the set. This approach is
likely to produce new bids with a realistic chance of becoming part of
the provisionally winning set because it does not allocate any of the
shortfall to provisional winners or to bids that were simple ties with
provisionally winning bids but not chosen as provisional winners.[^11]

To illustrate the proposed new method for calculating part (iii) of the
minimum accepted bid formula, consider the following example: Suppose
that in round x the provisionally winning set is a set of two packages:
one nationwide package of the10 MHz licenses and another nationwide
package of the 20 MHz licenses. The revenue for this set is
\$500,000,000. Suppose that the last time Bidder A bid on the Northeast
10 MHz license was in round y when he made a bid of \$30,000,000. To
determine the minimum accepted bid amount in round x+1 for Bidder A for
the Northeast 10 MHz license, we begin by calculating the shortfall for
that license. This is calculated by forcing Bidder A's \$30,000,000 bid
from round y into the solution set for round x, allowing that bid to
partner with all other bids by Bidder A in the considered bid set from
round y, and making it mutually exclusive with all of Bidder A's bids
not in round y.[^12] Assume that the maximum revenue obtained by forcing
this bid into the solution set is \$400,000,000. Therefore, the
shortfall for this bid is \$100,000,000 (\$500,000,000 - \$400,000,000).
Next, to address the possibility of multiple shortfall sets, we solve an
optimization problem that maximizes the number of provisionally winning
bidding units from round x in the shortfall set with the added
constraints that the maximum revenue equals \$400,000,000 and that
Bidder A's bid on the 10 MHz license must be in the solution. Suppose
that the solution set for this optimization problem includes, in
addition to Bidder A's 10 MHz Northeast license, the package of
nationwide 20 MHz licenses that was in the provisionally winning set,
and one or more other packages making up the remaining five 10 MHz
licenses. Since provisionally winning bids have no shortfall, we would
allocate the shortfall *only* among those bids in the shortfall set that
are *not* in the provisionally winning set. The total bidding units from
non-provisionally winning bids is 6 \* 14,000,000 = 84,000,000 bidding
units.[^13] Since Bidder A's bid has 14,000,000 of the 84,000,000
bidding units, 14,000,000 / 84,000,000, or 1/6, the shortfall would be
allocated to Bidder A's bid on the Northeast 10 MHz license. Thus, the
minimum accepted bid increment for Bidder A's bid using this calculation
would be \$100,000,000 / 6 = \$16,667,000 (rounded to the nearest
thousand), making part (iii) of the new minimum accepted bid for this
license \$46,667,000 for Bidder A (\$16,667,000 + \$30,000,000 (Bidder
A's previous bid)).[^14] Part (i) of the minimum accepted bid formula
would be the minimum opening bid for this license (\$14,000,000), and
part (ii) would be x% more than this bidder's previous bid amount
(assuming x = 10, \$33,000,000). Part (iii) yields the maximum value
among the three alternatives; accordingly, Bidder A's minimum accepted
bid for this license in the next round would be \$46,667,000.

We propose an exception to the modified minimum accepted bid formula for
new packages. For operational considerations (running the optimization
solver only between rounds), we propose that part (iii) of the formula
for the initial minimum accepted bid for a new package created during
the auction will continue to be calculated by multiplying the number of
bidding units in the package by the lowest \$/bidding unit of any
provisionally winning bid in the last five rounds. This exception will
not apply to bids for the global package, however. In that case we will
apply the three-part calculation as modified herein because the
shortfall and deficit are so simple to calculate. Because a bid for the
global package could never become a provisional winner unless it equals
the maximum revenue from the previous round, we propose that the initial
minimum accepted bid of a global package will be a percentage of the
maximum revenue from the previous round. We seek comment on this
proposal.

**II. "Last and Best" Bids**

In the *Auction No. 31* *Package Bidding Procedures* *Public Notice,* we
adopted a procedure by which bidders that wish to drop out of the
auction would have the opportunity before they drop out to make a "last
and best" bid on any license or package for which they remain
eligible.[^15] We adopted this procedure in part to allow bidders to bid
the maximum amount they are willing to pay for a package regardless of
how the Commission sets the minimum accepted bid.[^16] We propose to
modify this procedure to allow bidders to pursue contingent bidding
strategies. In mock auctions we conducted for software testing, there
were bidders who wanted to provide a "last and best" bid on every
license or package they wanted but did not have the opportunity to do so
because some of their bids were mutually exclusive. Allowing two rounds
of "last and best" bids would give bidders this flexibility.
Specifically, we propose to allow bidders to make two sets of mutually
exclusive last and best bids. In determining the provisionally winning
bid(s), the round solver would consider these two sets of mutually
exclusive bids, as well as any of the bidder's bids that remain in the
provisionally winning set. The bidder who chooses this option would not
be permitted to make any further bids during the auction. We seek
comment on this proposal to modify the "last and best" bid procedures.

Comments are due on or before November 15, 2000, and reply comments are
due on or before November 22, 2000. Comments should refer to the DA
number on this *Public Notice*, DA 00-2404. An original and four copies
of all pleadings must be filed with the Commission's Secretary, Magalie
Roman Salas, Office of the Secretary, Federal Communications Commission,
445 Twelfth Street, S.W., TW-A325, Washington, DC 20054, in accordance
with Section 1.51(c) of the Commission's rules. *See* 47 C.F.R. §
1.51(c). In addition, one copy of each comment must be delivered to each
of the following locations: (1) the Commission's duplicating contractor,
International Transcription Service, Inc. (ITS), 1231 20th Street, N.W.,
Washington, DC 20036; (2) Office of Media Relations, Public Reference
Center, 445 Twelfth Street, S.W., CY-A257, Washington, DC 20554; (3)
Rana Shuler, Auctions and Industry Analysis Division, Wireless
Telecommunications Bureau, 445 Twelfth Street, S.W., 4‑A628, Washington,
DC 20554. Comments and reply comments will be available for public
inspection during regular business hours in the FCC Public Reference
Room, CY-A257, 445 12th Street, S.W., Washington, DC 20554.

This proceeding has been designated as a "permit‑but‑disclose"
proceeding in accordance with the Commission's *ex parte* rules. *See*
47 C.F.R. §§ 1.1200(a), 1.1206. Persons making oral *ex parte*
presentations are reminded that memoranda summarizing the presentations
must contain summaries of the substance of the presentations and not
merely a listing of the subjects discussed. More than a one or two
sentence description of the views and arguments presented is generally
required. *See* 47 C.F.R. § 1.1206(b). Other rules pertaining to oral
and written *ex parte* presentations in permit-but-disclose proceedings
are set forth in Section 1.1206(b) of the Commission's rules, 47 C.F.R.
§ 1.1206(b).

For further information concerning this proceeding, contact Walter D.
Strack, Bureau Chief Economist, Wireless Telecommunications Bureau,
(202) 418-0600; Evan Kwerel, Senior Economist, Office of Plans and
Policy, (202) 418-2030; Howard Davenport, Auctions Attorney; Craig
Bomberger, Auctions Analyst; or Karen Wrege, Auctions and Industry
Analysis Division, Wireless Telecommunications Bureau, (202) 418-0660.

[^1]: *See* Auction of Licenses in the 747-762 and 777-792 MHz Bands
    Scheduled for September 6, 2000, Procedures Implementing Package
    Bidding for Auction No. 31; Bidder Seminar Scheduled for July 24,
    2000, DA 00-1486, 15 FCC Rcd 11526, (rel. July 3, 2000) (*Auction
    No. 31 Package Bidding Procedures Public Notice*).

[^2]: *Id* at 11545.

[^3]: *See* A "Bids and Offer" Approach to Package Bidding, Rakesh Vohra
    and Robert J. Weber, pp. 7-10 (May 15, 2000).

[^4]: *See* Making the FCC's First Combinatorial Auction Work Well,
    Comment on DA 00-1075, Comment Sought on Modifying the Simultaneous
    Multiple Round Auction Design to Allow Combinatorial (Package)
    Bidding" Report No. AUC-00-31-G (Auction No. 31), Aleksandar Pekec
    and Michael H. Rothkopf (June 7, 2000) ("Pekec and Rothkopf
    Comments").

[^5]: *See* Comments Submitted by Paul Milgrom, Re: *Public Notice* DA
    00-1075, (June 14, 2000) ("Milgrom Comments").

[^6]: *See* Auction of Licenses in the 747-762 and 777-792 MHz Bands
    Scheduled for September 6, 2000; Comment Sought on Modifying The
    Simultaneous Multiple Round Auction Design to Allow Combinatorial
    (Package) Bidding, *Public Notice*, DA 00-1075, 15 FCC Rcd 8809,
    (rel. May 18, 2000) (\"*Auction No. 31 Package Bidding Comment
    Public Notice*\").

[^7]: *See* Milgrom Comments at 4.

[^8]: *Id.*

[^9]: *Supra,* Milgrom Comments at 3.

[^10]: ^10^ S*ee* Pekec and Rothkopf Comments at 4.

[^11]: A simple tie is a bid of the same amount on the same license or
    package. This approach does not eliminate the possibility that some
    of the shortfall may be allocated to complex ties that could have
    been in some provisionally winning bid set, just not the one chosen.

[^12]: The considered set includes (i) the bids made by each bidder in
    the most recent two rounds in which that bidder placed new or
    renewed bids and (ii) all provisionally winning bids from the prior
    round. For example, if y=x then all the bids in round x of Bidder A
    can partner with this bid because they would be in the considered
    set.

[^13]: Each 10 MHz license has 14 million bidding units.

[^14]: This assumes that we set part (iii) of the formula at 100% of the
    deficit, as proposed above.

[^15]: *Supra*, 15 FCC Rcd. at 11548.

[^16]: *Id.*