Milgrom Paper Provides More Insight on Possible Incentive Auction Design

The auction design is likely to be controversial, an FCC official said Wednesday. “At the 100,000-foot level, it has never been done before, but even at the 75,000 foot level it’s hard to understand what they're talking about,” the official said. “There’s a very great need to make it simple for broadcasters, so that they come to the table."

"Paul Milgrom is a genius,” said George Ford, chief economist at the Phoenix Center. “If he is planning this without the meddling of the chairman or any other politician, then there’s a very good chance it’s a good plan. That’s obviously a strong assumption, since Dr. Milgrom is working for the FCC. Also, in my experience, there is no idea so good that the government can’t mess it up in implementation. We must watch to see if what the experts recommend is what the political appointees actually implement."

Former FCC Chief Economist Leslie Marx agreed that the economists working on the auction are highly respected. “In general, I have concerns about the FCC taking a ‘just leave the computations up to us’ attitude, especially in a clock auction with intra-round bidding, which I have never found to be particularly transparent,” Marx said. “I look forward to studying the specifics of the proposal to understand better how these details will be implemented.” She’s now a professor at Duke University.

"For the Reverse Auction, the most unusual challenge arises because the quantity of spectrum cleared depends not only on the broadcast licenses relinquished in the auction but also on how the remaining broadcast stations -- the ones that are not sold -- are assigned to channels,” the paper said (http://xrl.us/bnshov). “Additional complications arise because the Reverse Auction must account for more possibilities than simply selling broadcast rights. In exchange for compensation, some stations may be willing to switch from broadcasting on a UHF channel to broadcasting on an upper VHF or lower VHF channel; others may be willing to engage in channel-sharing, combining their digital signals to be carried on a single channel; and still others may be willing to tolerate some increase in the area where their signals suffer interference."

The paper offers a “simple example” of how a reverse clock auction would work. “Suppose that the FCC needs to clear three stations in some market and that five stations have indicated a willingness to sell at the reserve price,” the paper said. “Suppose that all five stations are broadcasting from the same location, so clearing any three would meet the FCC’s needs. During the auction, the FCC offers a sequence of declining prices until one station says `no.’ At that point, four stations are still offering to go off-air, and the FCC just needs three, so there is still excess supply. The FCC continues to lower the offered price until a second station says `no.’ At that point, just three stations remain. There is no longer excess supply, so the auction ends. The two stations that exited the auction are assigned channels, and the three remaining stations are paid the last offered price to go off-air.”

The proposed auction design “guarantees that two stations that broadcast in the same band with the same coverage area will receive identical price offers for all relinquishment options,” requiring TV stations to provide only limited information and making bidding as simple as possible, the paper contended. “For a bidder that is considering only the option of going off-air rather than maintaining its UHF license, the hardest part of bidding will be to determine its value of continuing to broadcast,” the paper said. “The bidder cannot do better than to agree to accept any price greater than its value of continuing to broadcast and then to exit if its offered price falls lower than that."

The auction design also keeps the process simple for wireless carriers looking to buy spectrum. “To make bidding easy for bidders, this auction proposal has been designed so that all the computational challenges fall on the FCC,” the paper asserted. “Essentially, the computational problem for the FCC is to determine how much it can lower the prices it is offering to broadcasters, and in what order, while still getting enough `yesses’ to meet its provisional clearing target."

This forward auction would be conducted using an “ascending clock” design, instead of the traditional simultaneous multiple round design used by the FCC in previous spectrum auctions. “A faster Forward Auction is valuable because the outcome of the Reverse Auction cannot be determined until the nearly completed Forward Auction lets the FCC decide how much it can afford to pay to clear spectrum,” the paper suggested. “Long delays in the Forward Auction could raise costs and discourage participation in the Reverse Auction.”

Under the proposal, licenses would be “generic,” the paper said. “During the main phase of the auction, bidders specify how much spectrum they want in a particular geographic area, e.g. 40 MHz (20 MHz uplink + 20 MHz downlink), rather than specific frequencies (e.g. blocks A, B, D, F). The auction winners are assigned specific frequencies in a separate `assignment phase’ of the auction,” under the proposal. “At each round, the FCC announces prices for the licenses, raising the prices of the licenses that were in excess demand in the prior round. The bidders then state their demands, that is, the amount of spectrum in each area they wish to buy at the announced prices.” Unlike traditional auctions, provisionally winning bids would not be announced at the end of each round. “Intra-round bidding is used instead,” the paper said. “Intra-round bidding ensures that prices never increase so much that the number of units demanded for a type of license falls from above to below the available supply, leaving licenses unsold when there are willing buyers. Intra-round bids allow bidders to express the price points in the interval between the start-of-round and end-of-round prices at which they would change their demands and to specify how their demands would change.”