Yesterday, the FCC approved procedures for its June 29, 2006 auction of spectrum licenses for Advanced Wireless Services (AWS-1).  What is interesting about the procedures for this auction is that the bidders are likely to be anonymous in order to promote competition.  According to the FCC’s news release (.pdf):

the FCC established procedures designed to promote competition and efficiency in the AWS-1 auction. The FCC has decided that, unless a certain threshold level of likely competition among bidders exists before the bidding begins, as indicated by the level of upfront payments made by prospective bidders, it will not make the following information available until after the close of the auction: 1) bidders’ license selections on their short form applications (Form 175); and (2) the identities of bidders that placed bids in each round, as well as other information on bidder activity and eligibility. Under this approach, the FCC will disclose the identities of the bidders after the filing of the short form applications and the level of upfront payments of individual bidders after those payments are made. During the auction, with regard to individual bids, the FCC will disclose at the end of each round of bidding the gross amount of every bid placed in each round but not the identity of the bidder that placed any particular bid in that round. If the auction appears likely to be competitive in advance of the start of the bidding, that is, if there is a modified threshold eligibility ratio of three or greater, the anticompetitive bidding behavior that the proposal was designed to prevent is less likely to be successful. Under those circumstances, the FCC would make available all information that has customarily been made available during an auction. In the years since the FCC’s auctions were first developed, economists and analysts have observed that bidders can use the information revealed over the multiple rounds in an FCC auction to signal each other to coordinate bids, retaliate against bidders that do not cooperate, or engage in other undesirable strategic behavior. Such behavior distorts prices and may lead to an inefficient assignment of spectrum licenses. Therefore, the competitiveness and economic efficiency of the auction may be enhanced if certain information about the auction is withheld and competing bidders are prevented from coordinating their bids with one another.

(I love the phrase “undesirable strategic behavior.”)

Auctions like this one are the subject of extensive analysis by economists.  One of the best articles (if not the best article) about FCC spectrum auctions and competition is Peter Cramton & Jesse A. Schwartz, Collusive Bidding in the FCC Spectrum Auctions, 1 Contributions to Economic Analysis & Policy 1 (2002).  Its abstract states:

This paper describes the bid signaling that occurred in many of the FCC spectrum auctions. Bidders in these auctions bid on numerous spectrum licenses simultaneously, with bidding remaining open on all licenses until no bidder is willing to raise the bid on any license. Simultaneous open bidding allows bidders to send messages to their rivals, telling them on which licenses to bid and which to avoid. This “code bidding” occurs when one bidder tags the last few digits of its bid with the market number of a related license. We examine how extensively bidders signaled each other with retaliating bids and code bids in the DEF-block PCS spectrum auction. We find that only a small fraction of the bidders commonly used retaliating bids and code bids. These bidders won more than 40% of the spectrum for sale and paid significantly less for their overall winnings.

The FTC’s Bureau of Economics submitted a comment (.pdf) in response to the FCC’s public notice regarding the AWS-1 auction encouraging the withholding of bidder identities and actions during the auction.  In the section titled “Likely Effects of Changes” the comment states (footnotes omitted):

The combination of evidence from the theoretical and empirical economics literature suggests that concern over the competitive environment in SMR spectrum auctions is certainly warranted. A policy of not revealing the identity of the current highest bidders would make it impossible to adopt a punishment strategy in the current auction that is targeted at a bidder who deviates from a collusive strategy, and may also make the deviation more difficult to detect. These two effects are often postulated to make a collusive agreement more difficult to maintain. For instance, collusion facilitated through the types of bid signaling, retaliatory bidding, and bid jumping strategies found in the empirical literature on previous FCC auctions would not be feasible under these new rules. While it is perfectly reasonable to adjust the rules to dissuade observed suspicious behavior, it should be noted that some of the collusive strategies detailed in the theoretical literature do not depend on being able to identify bidders.

It will be interesting to see what effects the FCC’s changes to its auction procedures will have.

Technorati Tags: FCC, FTC, wireless auction, AWS-1, SMR spectrum,  economics

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