The Battle to Repurpose Spectrum

By TAP Staff Blogger

Posted on February 15, 2012

The Federal Communications Commission (FCC) faces an uphill battle in its efforts to repurpose spectrum for the mobile market. Spectrum is scarce and needs to be used most efficiently, but that’s easier said than done. In their new paper, “Holdout in the Assembly of Complements: A Problem for Market Design,” E. Glen Weyl, Assistant Professor in the Department of Economics and the College, University of Chicago, and Scott Duke Kominers, research scholar at the University of Chicago, delve into the issues involved with repurposing spectrum, and offer their thoughts on a solution.

The issue – say Weyl and Kominers – is that in order to reallocate spectrum profitably there would need to be large adjoining spectrum blocks within markets. However, currently, spectrum ownership is fragmented among many sellers.

Currently, the FCC is pushing Congress for permission to stage voluntary spectrum auctions as the mobile market grows. The idea of voluntary auctions, where broadcasters give up their share of under-used spectrum for auction in exchange for part of the proceeds, has been stagnated by political debate.

A recently proposed bill in Congress may even take away the FCC’s power to monitor spectrum auctioning. The bill would prevent the FCC from imposing restrictions, such as acquisition limits or prohibitions on bidding for who can buy spectrum at future auctions – which is good for big carriers like Verizon and AT&T, but bad for the smaller ones.

With “Holdout in the Assembly of Complements: A Problem for Market Design,” Weyl and Kominers discuss the problems holdouts create for the effective operation of markets. To explain this a bit: consider multiple sellers owning complementary components of a good (i.e., land, spectrum, patents), and naturally, each seller will seek a share of the value derived when the individual components are assembled together. This ‘holding out’ for a share of the assembled value drives up the price of the good and reduces profits. The authors also discuss how previous approaches have used regulated government coercion. Traditional solutions to holdout problems involve compulsive government powers such as “eminent domain” to confiscate property. This often leads to wasteful assemblies and undermines property rights. Furthermore, the authors investigate how encouraging competition can substitute coercion.

Weyl and Kominers’ analysis is helpful to understand spectrum allocation. Originally, spectrum auctions did not suffer major holdout problems. The chief concern was assembling a presence in each of the several local markets. Recent spectrum reassembly efforts have raised serious concerns as they require contiguous blocks of spectrum within markets. “Repacking” the spectrum assigned to different occupants was recently proposed, allowing blocks to be reassembled from groups of sellers. While this could partially resolve the roadblock, it would be at the cost of forced relocation.

E. Glen Weyl is a TAP scholar whose academic focus is on pure and applied price theory, specifically concentrating on industrial organization, as well as the intersection between economics and other disciplines.