In recent years regulators have relied heavily upon assigning some licences via a competitive process involving (normally) a monetary payment (which we call an auction) rather than relying on alternative procedures such as comparative hearings. In which applications are judged on a range of criteria. A more complete discussion of the methods for selecting licensees can be found in Section 3 of the Spectrum Management Module. This present Section focuses on the pricing aspects of the selection process.
In an auction, contestants for a licence make competitive bids and the licence goes to the highest bidder. It is normal for the bids to be made in monetary term, the competitor offering the largest monetary sum getting the licence. But the competition can be in some other variable. For example, competitors can bid against are another over which of them will offer service over the largest geographical area. Or the competition can be in term of which operator will charge the lowest amount for service. Once the rules are established, however, the winner is determined by the operation of the competitive process, not by an administrative decision.
Switching from comparative hearings, followed by an administrative decision, to an auction does not in itself fundamentally change the spectrum regulatory regime. If licences specify in great detail the technological apparatus to be employed and services to be provided, the winner of an auction is as effectively tied down as a firm granted a licence by any other means. The key differences are that:
-
an auction assigns the licence to the firm which bids the most, and that may in certain conditions be the most efficient firm;
-
a competitive auction will, if it operates properly, cause any expected excess profits from providing the service to go to the Government, rather than the operator as would be the case if the operator were chosen via a competitive hearings.
The licence being auctioned is not always so prescriptive as assumed above, but may allow the successful licensee to choose what services to provide. We consider some of the resulting issues associated with change of use under the heading of ‘secondary trading in practice’.
Although auctions have been used in many countries over the last 10-15 years, it still remains the case that most of the spectrum in use in all countries has been allocated by administrative methods. Auctions tend in practice to be confined to cases where:
-
the spectrum available is in scarce supply;
-
many firms want to acquire licence;
-
the service to be provided with the spectrum can be precisely defined
-
the monetary value of the licence is relatively high, justifying what can be a complex assignment procedure.
It is clear, however, that auctions can be used in a wider class of cases than these. A successful auction process relies upon clarity about the rights and obligations being auctioned, and also from clear rules for the conduct of the auction. If either of these is absent, firms will face uncertainty which will make them reluctant to participate or to submit high bids.