SPECTRUM AUCTIONS: New research advises regulators how to avoid introducing fatal design flaws

Auction formats that are routinely used to allocate mobile telephone spectrum are often adapted and used by regulators with insufficient attention paid to the underlying economic principles, introducing inadvertent design flaws into multi-billion-dollar auctions.

That is one of the research findings by Lawrence Ausubel of the University of Maryland and Oleg Baranov of the University of Colorado at Boulder, published in the October 2017 issue of the Economic Journal. Their study provides a practical guide to successful implementation of a widely used format: the Combinatorial Clock Auction (CCA).

Over the past two decades, spectrum auctions have become the accepted method for governments worldwide to allocate telecommunication licences. Spectrum auctions are generally large, allocating mobile telephone rights worth billions of US dollars, and unique, requiring a customised approach to accommodate the specific needs of a particular setting.

The high stakes and the lack of a one-size-fits-all solution have led to exemplary collaboration between the regulators responsible for allocating spectrum and the academic community, which helps to design and study the auctions.

But this collaboration is incomplete. Most academic effort has been devoted to examining the high-level theoretical issues surrounding auction formats, while many of the questions important for practical applications are overlooked. Yet these small details can prove decisive for the overall success of the auction.

The Combinatorial Clock Auction (CCA) – recently one of the most popular auction format choices – presents a prominent case study. In the last five years, the CCA has been used for a variety of major spectrum auctions worldwide, raising approximately $20 billion in revenues. This auction format has allocated prime wireless spectrum on three continents, including in Australia, Austria, Canada, Denmark, Ireland, the Netherlands, Slovakia, Slovenia, Switzerland and the UK.

Frequently, regulators have needed to customise the basic CCA design in order to accommodate their specific objectives and unique environments. Fortunately for them, the CCA is a highly versatile design that allows integrating complex secondary objectives. Unfortunately, naïve integrations can easily introduce unintended consequences, damaging the auction''s performance as a whole.

Recent auctions have demonstrated that the details of implementing features even as commonplace as set-asides for new competitors or reserve prices to assure fair compensation for public resources can be far from trivial.

More generally, whenever a regulator seeks to superimpose side objectives on top of the standard CCA design, the nuances of the implementation can become critical. While the goal of accommodating additional features of the regulatory environment within a customised CCA is laudable, some of the custom design changes that have been implemented in recent large European CCAs appear to contradict the fundamental principles underlying this auction design.

The new study reviews and analyses some of the most common choices that a regulator needs to make when implementing the CCA. Regulators are encouraged to innovate around the basic CCA design to advance their novel objectives. But they are cautioned to pay heed to the basic principles underlying the CCA and thereby avoid introducing fatal design flaws.

''A Practical Guide to the Combinatorial Clock Auction'' by Lawrence Ausubel and Oleg Baranov is published in the October 2017 issue of the Economic Journal. Lawrence Ausubel is at the University of Maryland. Oleg Baranov is at the University of Colorado, Boulder.