There are several circumstances where an auction can be considered as a means of assigning licences:
The simplest case is one in which a single license is offered for auction in a self-standing process.
When two or more identical or complementary licences are offered, they can be offered sequentially or simultaneously. Where each licence is local, a simultaneous auction can allow firms to piece together local licences to provide broader coverage.
The licence(s) can be assigned on the basis of a so-called ‘open bidding’ or public process, with bids visible to other parties, or on a ‘sealed tender’ system, under which each party marks a single private offer; there are numerous alternative variants of open auctioning, one of which is the so-called clock auction.
The auction can have a minimum acceptable bid or ‘reserve price.
Some examples are given below:
- A spectrum regulator proposes to assign a single licence for the provision of a national second generation mobile telephone service. The successful applicant must commit itself to providing coverage to 50% of the land area and 80% the population. Sealed bids must be submitted by a specified date, by firms which have pre-qualified (i.e. have shown their competence to become a licensee). The winner is the firm which bids the most.
- Two or more licences to provide national 3G mobile services are auctioned.Pre-qualified applicants bid against each other in an open bidding auction. They have the opportunity to submit new bids for the licences at pre-specified intervals. The auction ends when the winning bids for each licence are the same, in terms of bidder and sum bid, as they were in the previous round. To ensure completion of such an auction, firms must be made to bid at a specified frequency.
- This example is similar to the 3G example above, except that there is restriction as to the use to which the winning competitor can put the spectrum (provided that interference conditions are met). Such auctions are said to exhibit technology- and service-neutrality. A country’s territory is divided into, for instance, twenty areas, and three (identical or similar) licences are auctioned in each area (sixty in all). The procedure is an open bidding one. At each round, a firm can bid for one licence in each region. This procedure makes it possible for firms to put together a national service by bidding in all areas simultaneously. At the opposite extreme a firm can bid to provide a local service in one area only.
- An ascending clock auction is a procedure for selling multiple identical licences which requires the auctioneer to announce prices to bidders that increase over time (ascend with the clock) and bidders choose whether to accept or reject the announced prices. The auction is over when the number of bids equals the number of licences. The winning bidders all pay the required bid amount and each of them is assigned an identical licence. Variants of the clock auction can accommodate differences among licences, via a separate sequence of prices for each one. Clock auctions can also be combined with a subsequent phases to deal with bids for packages of complementary licences.
The choice of auction mode will vary with the nature of licences made available, the number and nature of firms with an interest in theirs and the regulator’s or government’s objectives. There are a number of trade-offs between, for example, the advantages which an open auctioning system has in spreading knowledge among firms about other firms’ valuations, hence encouraging higher bidding, and the opportunities for collusion among bidders which the communication present in open auctioning may facilitate. As a result, each set of circumstances tends to require an individual solution.