auction - Journal of Economic Perspectives-Volume 8, Number...

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Journal of Economic Perspectives Volume 8, Number 3 Summer 1994 Pages 145-162 Selling Spectrum Rights John McMillan "It has shades of the '49 California gold rush," remarked one indus- try observer. "It's the 21st century equivalent of the Oklahoma land rush," said another. 1 The sought-after item is the radio spectrum, which the U.S. government has put on the auction block. The wavelengths on offer, formerly reserved for the military, are to be used for newly invented personal communications services (PCS): pocket telephones, portable fax machines, and wireless computer networks. The auction is one of the biggest and most complicated in history. The spectrum on offer is estimated by the Office of Management and Budget (1993, p. 21) to be worth $10.6 billion. Thousands of spectrum licenses are for sale. The bidders include most U.S. telecommunications firms: long-distance, local, and cellular telephone companies and cable-television companies. After spending billions for the spectrum licenses, the firms will invest still bigger sums installing transmitters and developing a customer case. The return is highly uncertain. The new PCS operators will compete not only with each other but also with entrenched cellular-telephone companies. The PCS technology is still being developed. The potential size of the market is unknown. (Will cordless telephones eventually replace many of the telephones now tethered by wires? Will the new wireless multimedia systems—carrying video and data as well as the spoken word—be in wide demand?) Successful bidders face daunt- ing risks, but could make huge profits. 1 Business Week , November 29, 1993, p. 128; and Tom Wheeler, president of the Cellular Telecom- munications Industry Association, in the Financial Times , October 18, 1993, p. VIII. John McMillan is Professor of Economics, Graduate School of International Rela- tions and Pacific Studies, University of California, San Diego.
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146 Journal of Economic Perspectives The story of how the spectrum auction was designed is a case study in the policy application of economic theory. The major telephone companies and the government relied on the advice of theorists. Paul Milgrom, Robert Wilson, and Charles Plott were hired by Pacific Bell, Jeremy Bulow and Barry Nalebuff by Bell Atlantic, Preston McAfee by Airtouch Communications, Robert Weber by Telephone and Data Systems, Mark Isaac by the Cellular Telecommunications Industry Association, Robert Harris and Michael Katz by Nynex, Daniel Vincent by American Personal Communications, Peter Cramton by MCI, John Ledyard and David Porter by the National Telecommunications and Infor- mation Administration, and the author of this article by the Federal Com- munications Commission (FCC). This was perhaps the biggest use of economic theorists as consultants since that other telephone-industry revolution, the The analysis of how auctions work is one of the successes of modern
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auction - Journal of Economic Perspectives-Volume 8, Number...

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