Presentation Date: July 14, 2009, ACCC Conference, Brisbane, Australia. Thomas W. Hazlett, Professor of Law & Economics, George Mason University School of Law.
Long resisted by policy makers, competitive bidding for U.S. wireless licenses commenced July 25, 1994. Since then, some 85 auctions have been held, 27,484 licenses sold, and $52.6 billion paid to the government. Hailed by regulators and academic economists as a success story, the policy reform has resolved several inefficiencies in license assignments. Yet, new challenges have emerged. Over one-third of winning bids have proven uncollectible. More problematically, spectrum allotments stalled, 1996-2006, as policy makers attempted to withhold bandwidth in order to raise (delayed) auction bids. This reduced wireless competition and deterred 3G technology adoption. In 2007-08, regulators began to “de-liberalize” wireless licenses, mandating business models in order to specify market structure. This policy swings back to traditional regulation, attempting to produce “public interest” outputs by controlling spectrum inputs. At bottom, license auctions expose a fundamental tension between welfare-maximizing frequency allocations and government rent-extraction. With the state property spectrum regime intact, assigning licenses by competitive bidding – transferring rents from licensees, including new entrants, to the fisc — may ironically exacerbate the under-allocation of radio spectrum.
Introduction: On July 25, 1994, the Federal Communications Commission commenced Auction No. 1, selling ten Narrowband Personal Communications Services (N-PCS) licenses used for paging services. Aggregate winning bids of $617 million were generated. While N-PCS failed to prove profitable, the government captured significant revenues and moved to hold additional auctions. In March 1995, 99 broadband personal communications services licenses (PCS) offering rights enabling competition with cellular operators were sold for $7 billion. As of July 1, 2009, the U.S. Government had realized $52.6 billion in license revenues.
Auctions are now a well-established license assignment tool. “[S]pectrum auctions in the US have been a great success,” a viewpoint widely shared by economists. Policy makers have been energetic in claiming credit for their implementation. Indeed, wireless auctions now constitute a paradigmatic example of efficient regulatory reform.
One has to peer into history to discover that the policy was highly contentious. Competitive bidding for licenses was proposed for many decades prior to its congressional authorization in 1993. The legislative change occurred only after other countries – notably New Zealand and India – blazed a trail. Communications experts in the U.S. had alleged that private rights in the use of radio spectrum could not be sufficiently well-defined – “[r]ights to use the spectrum are not susceptible to legal enforcement as are private property rights” – as to support competitive bidding, and political opponents had argued that their use would “emasculate ‘socially desirable’ censorship.”
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