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Radio Frequency Spectrum Allocation
Who populated Auction theory?
1. The Nobel Prize in 2020 was given to two economists - Paul R. Wilgrom and Robert B.Wilson who made the auction theory famous especially after the introduction of USA’s spectrum auction in 1994.
2. They developed many innovative and valuable format designs such as SMRA (Simultaneous Multiple Round Auctions), Share Auctions, Combinatorial Clock Auctions, and Incentive Auctions.
How are auctions classified?
1. Auctions are mainly of two types- Single and Multiple Item Auctions
2. Classical Auctions are of four types- English Auction, Clock or Dutch Auction, First-price Auction, Vickrey or Second-price Auction.
3. First price auction was found to be inefficient with asymmetric bidders but Second price and English auctions had always been efficient due to the issues of revenue generation.
4. The multi-object auction applies in the case of homogenous or divisible objects like government debt and electricity and in the heterogeneous or non-identical multiple objects such as radio frequencies or bus routes, which are of either complements or substitutes.
5. These involve exceptionally large values and governments face a challenging trade-off between raising revenue and allocating the spectrum efficiently.
6. In spectrum auctions, bidders mostly prefer combinations of complementary licenses which are more complex than substitute products.
7. Example- Phone service providers often seek to cover large areas due to which they prefer licenses for nearby geographical regions.
8. Vickrey-Clarkes-Groves auction (VCG) is useful for ensuring better efficiency. It is used in private value frameworks and a generalization of second price auctions.
9. SMRA auction designs for spectrum sales have been widely used in countries like the U.S, Canada, U.K., Finland, India, Poland, Germany, Sweden, Norway and Spain.
10. For radio frequencies, SMRA, CCA and Incentive Auctions have been relevant.
Which are the efficiency concerns regarding auctions?
1. The best productive suppliers minimize the cost. It generates funds through markets rather than rigid taxations.
2. It might lead to monopolization but increases the quality of telecom services for users.
Why is Government intervention necessary for spectrum allocation?
1. This is due to exponential rise in demand for wireless communication and radio frequencies are a scarce commodity.
2. Conflicts in spectrum management and their efficiency of use. For example-aggressive bidding in India during auctions led to major increases in spectrum prices.
3. The average holding of the spectrum of Indian operators was 31 MHz as compared to the global average of 50 MHz in 2017.
4. The Telecom Regulatory Authority of India (TRAI) had highlighted its recommendations on the auction of spectrum across several bands including two bands yet to be auctioned in India,
5. Spectrum pricing is an invaluable tool to promote efficiency.
What do ITU and TRAI propose for valuation of the spectrum?
International Telecommunication Union (ITU)
1. Price from previous auctions duly indexed.
2. Estimation based on producer surplus.
3. A production function approach.
4. A revenue surplus approach
1. TRAI also uses a multivariate regression method in addition to these approaches.
2. There are disputes between the state and the operators in allocating and managing spectrums in India.
3. India has been following a ‘quasi-property rights’ regime to avoid the subjective administrative management to a market-based mechanism.