The Effect of Spectrum Exhaust on Mobile Market Structure and Performance…

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In an effort to address the current spectrum crunch for commercial spectrum, Congress is working on legislation to empower the FCC to hold voluntary incentive auctions to facilitate the transfer spectrum from broadcasters to mobile carriers.  FCC Chairman Julius Genachowski, among others, are complaining loudly that the House version of the bill unduly constricts the FCC’s ability to manipulate the mobile industry by excluding some bidders from the auction (primarily the nation’s two most successful wireless firms that a little more than half of all Americans have chosen as their wireless carrier).  As Larry explained in a post dated January 17 and again in a post dated January 31, the motivation for the legislative proposals are well founded.  Chairman Genachowski has proven to be a proficient regulator, and past manipulations of auctions have cost billions in lost revenues with no discernible benefit.  The House version of the legislation simply ensures that the FCC let everyone bid on spectrum; given a market economy and a politically-motivated regulatory body, this requirement seems imminently reasonable.  To quote FCC Wireless Bureau Chief Rick Kaplan, “every carrier needs spectrum” and, as such “We want to make sure that carriers of every size have the opportunity to bid.”  This is exactly what the House bill legislatively guarantees.

What is particularly interesting to me about the debate over the legislation is that these bills are intended to address the important issue of spectrum exhaust.  The criticism against the House version of bill is, however, motivated by the idea that the wireless industry is too concentrated, and that the high concentration implies high prices.  This “high concentration equals high price” argument embraces a particular and somewhat standard view of the way firms compete (Cournot Competition).  Yet, the standard model does not contemplate an institutional feature like spectrum exhaust.  What happens, then, when firms compete in the way the FCC claims they do (Cournot Competition), but do so under a spectrum constraint?  One would think that the FCC, as the expert agency, would have this problem worked out.  They don’t.  So we did it for them.

While we plan to release a complete paper detailing our economic analysis next week, I revealed our preliminary findings at our Annual U.S. Telecoms Symposium in December.  Our findings are a game changer in communications policy.  Bottom line, the addition of a spectrum constraint to the standard model of competition turns the standard view that high industry concentration is a bellwether of poor economic performance on its head.  Under a binding spectrum constraint, a market characterized by few firms (rather than a large number of firms) is more likely to produce lower prices and increase sector investment and employment.  Since the FCC (and in particular Chairman Genachowski) consistently admits to spectrum exhaust, then the agency’s efforts to reduce industry concentration is arguably wrongheaded.  Perhaps putting limits on Genachowski’s efforts to manipulate industry structure via auction rules is for his own good (assuming he is interested in the good of consumers).

For those interested in getting a head start before we release our paper, you can download my Symposium slides here and follow along with the video of my full presentation (my speech starts at about 1:03:30) below:

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Until next week…