Simple Rules For Spectrum

Washington is getting closer to unleashing more spectrum to fuel the digital economy and stay ahead of capacity constraints that will stymie innovation and raise prices for consumers. Ahead of the July 23 Congressional hearing on spectrum auctions, we should keep a couple things in mind. First and foremost, we need “Simple Rules for a Complex World.” It’s a basic idea that should apply to all policymaking. But especially in the exceedingly complex and fast-moving digital ecosystem.

A number of firms are seeking special rules that would complicate — and possibly undermine — the auctions. They want to exclude some rival firms from bidding in the auctions. They are suggesting exclusions, triggers, “one-third caps,” and other Rube Goldberg mechanisms they hope will tip the auction scales in their favor.

Using examples from the labor markets and capital markets, we showed in a recent paper that complex policies — even though well intended and designed by smart people — often yield perverse results. Laws and regulations should be few, simple, and neutral. Those advocating the special auction rules favor a process that is complex and biased.

They are also using complicated arguments to back their preferred complicated process. Some are asserting a “less is more” theory of auctions — the idea that fewer bidders can yield higher auction revenues. If it seems counterintuitive, it is. Their theory is based on a very specific, hypothetical auction where a dominant monopolist might scare off a potential new market entrant from bidding at all and walk away with the underpriced auction items. This hypothetical does not apply to America’s actual wireless spectrum market.

The U.S. has four national mobile service providers and a number of regional providers. We have lots of existing players, most of whom plan to bid in the auctions. As all the theory and evidence shows, in this situation, an open process with more bidders means a better auction — spectrum flowing to its highest value uses and more overall revenue.

Some studies show a policy excluding the top two bidders in the auction could reduce revenue by up to 40% — or $12 billion. This would not only prevent spectrum from flowing to its best use but could also jeopardize the whole purpose of the incentive auction, because lower prices could discourage TV broadcasters from “selling” their valuable airwaves. If the auction falls short, that means less spectrum, less mobile capacity, slower mobile broadband, and higher consumer prices. (See our recent Forbes article on the topic.)

Fortunately, several Members of Congress are adhering to the Simple Rules idea. They want to keep the spectrum auction open and competitive. They think this will  yield the most auction revenues and ensure the maximum amount of underutilized broadcast spectrum is repurposed for wireless broadband.

The argument for simple auction rules is simple. The argument for complex auction rules is very complicated.

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