Reclaiming Spectrum from Incumbents in Inefficiently Allocated Bands: Transaction Costs, Competition, and Flexibility

Article Source: Telecommunications Policy, Vol. 45, No. 7, August, 2021
Publication Date:
Time to Read: 3 minute read
Written By:

 Andrzej (Andy) Skrzypacz

Andrzej (Andy) Skrzypacz



Some electromagnetic spectrum is used inefficiently. In reclaiming this spectrum for allocation to more efficient uses and users, the FCC may choose between a simple overlay auction and a more complex two-sided auction.


Policy Relevance:

Two-sided auctions can enable the FCC to safeguard competition and reduce costs. Sometimes, a simple overlay auction is better.


Key Takeaways:
  • The Federal Communications Commission (FCC) seeks to reclaim inefficiently used electromagnetic spectrum for new uses and users, but incumbent spectrum users impede this transition.
    • Before the 1990s, spectrum licensees were often limited to small geographic sites or to specific technologies.
    • Now, licensees are granted rights over wider geographic areas and the flexibility to adopt new technologies.
  • The FCC’s main goal in repurposing spectrum is to support competition between wireless service providers, while minimizing transaction costs and holdout costs.
  • Auctions award licenses to the highest bidder, meaning that spectrum auctions do not always maximize the benefits to consumers from competition; generally, the FCC encourages competition by restricting eligibility to bid and setting aside spectrum for some bidders.
  • In an "overlay" auction, incumbent licensees keep their original rights and duties, but the "overlay" licensee acquires all other spectrum rights (such as the right to secondary uses of existing channels); the overlay licensee may negotiate with the incumbent to coordinate new uses of the band.
    • The overlay licensee could pay the incumbent to cease transmission and give up its rights.
    • Overlay auctions rely on market forces, and overlay licenses can be implemented quickly.
  • One important market-based alternative to the overlay auction is a centralized two-sided auction, in which the FCC serves as market maker and can add command-and-control rules as needed.
  • The FCC’s 2016 Broadcast Incentive Auction, in which the FCC reclaimed spectrum used by television broadcasters, shows that a two-sided auction can be superior to an “overlay” auction.
    • The FCC first held a reverse auction, offering payment to the television broadcasters to vacate the spectrum; at the end, some remained.
    • Next, the FCC auctioned reclaimed spectrum to new wireless service providers.
    • The FCC ordered many remaining broadcasters to relocate to new spectrum.
    • The FCC’s supplemental rules fostered competition between new service providers.
  • Without the FCC’s power to require broadcasters to relocate, broadcasters could have held out for large payments from new licensees, raising the cost of the transition; an overlay auction of this spectrum would have required thousands of negotiations between broadcasters and new licensees.
  • In deciding whether to use a simple overlay auction or to use more complex rules, the FCC should first consider how much of the band is occupied by incumbents; if few incumbents are present, the FCC will have less need to mandate relocation to reduce the number of negotiations.
  • If new users can easily avoid conflict with incumbents, there will be less hold-up, and an overlay auction could be used.
  • When observers do not know whether the incumbent service or a more flexible service would be more valuable, an overlay auction might be better.
  • Large amounts of spectrum are not licensed for flexible use; overlay auctions could be useful for the remaining television bands.
    • The FCC will be unable to relocate incumbents to new facilities.
    • This spectrum is not critical to maintain competition between wireless services.
    • Overlay licensees may slowly to buy out incumbents.



Gregory L. Rosston

About Gregory L. Rosston

Gregory L. Rosston is Deputy Director and Senior Fellow at the Stanford Institute for Economic Policy Research (SIEPR) and Director of the Public Policy Program at Stanford University. He is also a Professor of Economics by courtesy and teaches courses on competition policy and strategy, intellectual property, personal finance, and writing and rhetoric. His research has focused on industrial organization, antitrust and regulation.