cient liquidity, lack of individual spectrum rights, high transaction costs and inefficiencies, international constraints, market failures, and conflict with public policy.

<u>Insufficient liquidity. Relatively few buyers,</u> sellers, or available frequencies. Markets require choice among competing price offers and substitutable goods, in this case frequencies and authorized transmission zones. When this condition is not met, increasing spectrum demand and supply should be a policy objective.

<u>Lack of individual rights. Spectrum trading and liberalization can be applied only if individ-</u> ual spectrum users have specific spectrum rights. The industrial, scientific, and medical (ISM) radio bands were originally reserved internationally for non-commercial purposes in these fields. In recent years they have also been used for license-exempt communications applications with built-in tolerance for error, such as wireless local area networks. Shortrange low-power devices, such as cordless phones, wireless microphones, medical implants, and remote controls, also generally do not require individual user licenses.<sup>46</sup> Amateur radio operators require operator licenses awarded on the basis of skill and knowledge tests but are not assigned individual frequencies.<sup>47</sup> In all these cases users have no spectrum rights that might be traded.<sup>48</sup> <u>High transaction costs and inefficiencies. Efficient trades materialize only if transaction costs</u> (incurred by buyers and sellers to find each other and agree on a trade) are low relative to the value of the trade.<sup>49</sup> Measures to reduce transaction costs can be taken by the spectrum authority<sup>50</sup> or may develop in the market.<sup>51</sup> In some cases, however, it may not be possible to reduce transaction costs, and the spectrum rights approach would not work well. For example, where there are many small spectrum users it may be impractical to bring them all together in a trade, or the effort may be frustrated by some users attempting to get a free ride.<sup>52</sup> Spectrum hold-up, 46Although users are not licensed, the equipment sold for these purposes is typically subject to type approval that ensures compliance with technical standards designed to contain interference.

47Citizens’ band (CB) is another use of the spectrum for which users have no individual spectrum rights. 48This could be remedied by assigning rights just like initial property would be assigned, but this is not necessarily desirable.

49Reflecting high transaction costs, buyers will reduce their willingness to pay and sellers will not be exposed to the full opportunity cost of their spectrum. Likewise, sellers will increase their minimum price to reflect transaction costs, and buyers will find the cost of spectrum higher than warranted by its real scarcity in the economy. 50Transaction costs may be affected by the way spectrum rights of exiting users are defined. For example, trading would be discouraged if rights required prior regulatory approval in a way that places onerous or non-transparent criteria on whether unacceptable interference may result (Ercole 2004). At a different level, the spectrum authority can facilitate spectrum trading by maintaining and publishing up-to-date records of current spectrum holdings. 51For example, spectrum brokers help bring together buyers and sellers for which the cost of individually identifying trade opportunities might be excessive.

52This would be the case if one wanted to use the market to determine whether a particular band should be assigned to a single user or allocated for unlicensed use as a commons. The commons users typically would be numerous and anonymous, and although conceivably as a group they might be willing to pay more than an individual user for the spectrum, in practice it would be difficult to pull them all together into a trade. Moreover, since commoners do not have individual usage rights, some of them could refuse to pay their share of the price, on the expectation that they could get a free ride—once the band becomes (or remains) available as a commons they could use it at no cost. Theoretical approaches to solving free-rider problems are complex and generally impractical to apply.

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