# Presentation: 103861

## Voluntary Relocation of Spectrum Incumbents

- Paul Milgrom
- (based on work with Peter Cramton)
- November 2003

## The Problem

- Engineering efficient band plans...
- group low power uses together
- create contiguous bands
- provide consistent bands across geography
- Right to continue in a particular band/use
- Scattered incumbents may block transition to more efficient band plans
- Right creates “local monopoly” power
- Right avoids relocation costs
- Not a property right—efficient allocation is problematic
- Question: How to encourage voluntary relocation?

## Auction Solutions?

- Goal: outcomes in the “core”
- Efficient
- Reasonable prices
- Incentive problems
- _Threshold problem (package auction)_:
- Bidder for item A has value *a*
- Bidder for item B has value *b*
- Bidder for package AB has value *c** **<** **a+b*
- All values (or just *a* and *b*) unknown.
- _Bargaining problem (package exchange)_:
- Seller has cost *c*.
- Buyer has value *b *>*c*.
- Both values unknown.
- Non-core outcomes appear likely

## Should we be “concerned”?

*“**The systematic results thus far derived from the body of laboratory-controlled studies of the above [package auction] mechanism are:****1. There is little evidence that the threshold problem is of great concern****....*”
- 	David Porter, Stephen Rassenti, Anil Roopnarine, Vernon Smith (2003), “Combinatorial Auction Design,” *Proceedings of the National Academy of Sciences*
- Is this conclusion convincing?
- No systematic testing of related hypotheses
- Limited data availability
- Experimental conditions may suppress threshold effects
- External validity? Generalizability?

## Role of Substitutes

- If _and only if_ items are substitutes...
- Market clearing prices always exist*
- Vickrey outcomes always in the core**
- Ascending proxy auctions have “dominant strategies”**
- 	*Kelso-Crawford (1982), Gul-Stacchetti (1999), Milgrom (2000)
- 	**Ausubel-Milgrom (2002)
- Local monopoly power in spectrum because...
- geography and spectrum adjacency do matter
- so licenses are not good substitutes

## Spectrum Exchange Example

- Incumbent licensees on one dimension      A          B         C         D        E
- Bidder 1 seeks three adjacent bands
- Theoretical inefficiency
- Bargaining/threshold issue promotes inefficiency
- Problem worse for higher dimensions
- Problem worse for more adjacent bands

## Example, continued

- Incumbent licensees on one dimension      A          B         C         D        E
- Bidder 1 seeks three adjacent bands
*If incumbents agree to relocate...*
- Theoretical analysis
- Rights are more often substitutes
- Overlay license rents are low or zero
- Transition is successful, efficient
- Local monopoly power eliminated
- Incumbents will resist!

## Creating Substitutes

- Q: Can we make licenses substitutes?
- A: Yes, if incumbents can be relocated.
- Q: How to encourage voluntary relocation by auction/exchange sellers?
- A: Use a carrot for sellers who agree, such as
- Relocation costs paid
- Allow flexible use for licenses **offered** in the auction
- Allow flexible use for licenses **sold** in the auction
- Bidding credit for spectrum purchases based on licenses offered/sold.

## A Challenge to the Assumptions

## Silicon Valley Engineers’ View

- New technologies eliminate scarcity
- Smart, digital radios
- Low-powered signals
- Focused radio beams
- Spectrum management
- Current “property rights” regime hasn’t worked
- Changing technologies demand flexible management
- Spectrum commons approach should be employed
- Commons approach: FCC...
- sets standards
- ensure technically efficient use
- mandate good etiquette
- mandates universal access rules

## Advocates’ Comparison

- _Property rights w/ flexible use_
- Rights can be reallocated as needed (Coase Theorem)
- Avoiding all spectrum scarcity is too costly
- Universal access rules can be mandated
- Divided spectrum allows helpful variety of standards
- New technologies are adopted only when & where economical
- Uniform rules don’t respect differing compliance costs

- _Managed commons approach_
- Cost of negotiating over reallocations avoided
- Spectrum scarcity can be entirely avoided
- Universal access rules can be mandated
- Economies of scale in a single spectrum pool
- New technologies can be mandated for efficient spectrum use
- Coordination problems are avoided

## End