Game theory, then, models players' best responses to opponents' actions, assuming that each player always acts in his own best interest. The models also assume that any action taken by a player is the best strategy available, given the anticipated action of his opponent. Understanding this type of strategic interaction was important for the FCC because it needed to know how bidders would behave during the spectrum auction. Moreover, the commission also needed to design a set of auction rules that would accomplish Congress' goals. Therefore, the FCC called upon game theorists to aid in the design of the auction rules, giving economists a chance to test their theories in a real-world setting.
Every auction suffers from a number of potential problems.
By defining a proper set of rules for all participants to follow, however, such problems can be minimized. Agreements can be made beforehand, determining who will win and at what price. A simple solution to collusion is to hold an auction in which all participants submit sealed, written bids, and the highest bid wins. With sealed bids, effective collusion cannot occur because breaking the pact is now easy. If bidders are aware of this possibility, they might lower their offers, thereby reducing the seller's revenue.