George Ford

As the Federal Communications Commission begins to formalize rules for the upcoming voluntary incentive auctions for broadcast spectrum, questions regarding participation limits on the largest domestic wireless carriers remain open.

Proponents of bidder restrictions on AT&T and Verizon appeal to a “revenue- enhancement hypothesis,” under which the participation by the more successful carriers will allegedly discourage bidding by smaller firms and thus reduce total auction revenues.

In this bulletin, we analyze data from a recent large-scale spectrum auction to shed light on the validity of the revenue-enhancement hypothesis, and our findings are significant. Among other things, we find no evidence that AT&T and Verizon reduced the number of bidders for licenses. Moreover, we find no evidence to support the claim that lower auction revenues resulted from large firm participation.

As participants, the two increased overall auction revenues, both by winning licenses and by helping to reveal the valuations of other bidders. AT&T’s efforts (win or not) added a 21% premium to final auction prices above and beyond the revenue effects of the typical bidder.

AT&T alone accounted for nearly half of all auction proceeds, even though its winning bids were only about 10% of the total. Verizon’s impact was consistent with that of the average bidder. Accordingly, our findings contradict almost every key aspect of the revenue- enhancement hypothesis -- not only did AT&T’s and Verizon’s participation not deter smaller firms from entering the auction, but their participation substantially raised total auction proceeds. Empirical evidence supporting bidder exclusions or restrictions in the forthcoming voluntary incentive spectrum auctions therefore remains weak.

[Commentary] Congress tasked the Federal Communications Commission with the difficult job of having to figure out both the big picture and small details of the auction process, including how many licenses to auction in any given market.

This number would, in part, determine the number of firms offering mobile wireless services (in addition to the two already in operation). On this question, former FCC Chairman Reed Hundt indicated he relied heavily on the advice of Professor Michael Porter at the Harvard Business School. The government, the Professor rightly reasoned, could not pick the equilibrium number of firms in advance.

To sum up, the advice from Professor Porter was to sell too many licenses and let consolidation move the industry to its equilibrium. In light of Chairman Hundt’s “overshoot the equilibrium plan,” I find the Obama Administration’s hard line and much of the current debate over the price-increasing effects of further consolidation misplaced.

In this strategy devised by Professor Porter and Chairman Hundt, even if we limit the argument solely to a price effect, permitting consolidation from a point known to be “too many” can still be good policy. Significantly, under the Hundt-Porter strategy, even if we know a merger will lead to higher prices, this knowledge is not a sufficient reason to block a merger. Higher prices was, in large part, the plan.