Incentive Auctions Peter Cramton* Professor of Economics, - - PowerPoint PPT Presentation
Incentive Auctions Peter Cramton* Professor of Economics, University of Maryland Chairman, Market Design Inc. 3 June 2011 * Special thanks to Larry Ausubel, Evan Kwerel, and Paul Milgrom for collaborating with me on this topic over the last
Peter Cramton*
Professor of Economics, University of Maryland Chairman, Market Design Inc. 3 June 2011
* Special thanks to Larry Ausubel, Evan Kwerel, and Paul Milgrom for collaborating with me on this topic over the last dozen years. Thanks to the National Science Foundation for funding.
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High value Mobile broadband Low value Over-the-air TV broadcast
Auction includes essential regulatory steps to address market failures in the secondary market for spectrum
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Year Value per MHz 1985 1990 1995 2000 2005 2010 2015 Value of over-the-air broadcast TV Value of mobile broadband Gains from trade
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54 88 174 216 470 698 512 614 608 37
Lower VHF Upper VHF UHF
Public Safety
Current uses (TV broadcast)
TV ch 2-6 TV ch 7-13 TV ch 14-36 RA
54 88 174 216 470 698 512 614 608 37
Lower VHF Upper VHF UHF
Public Safety
Possible future uses
TV ch 2-6 TV ch 7-13 TV ch 14-?? RA
Flexible Use
TV ch 38-51 7
TV broadcaster freely decides to
Share with another
0 MHz 3 MHz 6 MHz
Spectrum freed
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For simplicity, I assume that channel sharing is only 2:1;
be considered, including negotiated shares with particular partners announced at qualification
– Broadcasters benefit from cooperating
– Spectrum given up only by broadcasters who put smallest value on over-the-air signal
– Avoids costly administrative process
– Clear only when value to mobile operator > value to TV broadcaster
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Combinatorial exchange
Too complex due to repacking Reverse auction to determine supply Forward auction to determine demand
Optimiza- tion gives mandatory repacking
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Market clearing and settlement
important =>
descending clock
– Price to cease – Price to share
TV broadcaster freely decides to
Share with another
0 MHz 3 MHz 6 MHz
Spectrum freed
Reverse auction to determine supply
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Reverse auction to determine supply
0 MHz
3 MHz
6 MHz
Price = $30/MHzPop
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Reverse auction to determine supply
0 MHz 3 MHz 6 MHz
Price = $20/MHzPop
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Reverse auction to determine supply
0 MHz 3 MHz 6 MHz
Price = $10/MHzPop
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Mandatory repacking
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Forward auction to determine demand
blocks of contiguous paired spectrum for LTE (4G)
– One to four 2 × 5 MHz lots
within and across regions
– Within region complementarities guaranteed with generic lots – Across region complementarities achieved through optimization of specific assignments
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– Price increased if there is excess demand – Process repeated until no excess demand
– Improve clock bids – Bid on other relevant packages
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Forward auction to determine demand Quantity Price P2 P3 P4 P5 P6 Supply P0 P1 Demand
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Forward auction to determine demand Quantity Price Supply P* Q*
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Demand
To Treasury To TV broadcasters
Forward auction to determine demand Quantity Price Supply PD Q0 PS Q*
Broadcasters cannot negotiate ex post with operators, since it is the FCC’s repacking that creates value; ex post trades would not benefit from repacking
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Demand
participate in the auction
– Destroys competition in reverse auction
– Reverses status quo—FCC can relocate stations – Creates holdout problem in reverse auction
– Impose specific requirement on government revenue share (e.g., Treasury gets 40% of revenue)
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To Treasury To TV broadcasters
Quantity Price Supply PD Q0 PS Q*
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Demand
Quantity Price Supply PD Q40% PS Q*
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Demand
To Treasury To TV broadcasters Revenue share constraint causes huge social welfare loss and reduces Treasury revenues!
participate in the auction
– Destroys competition in reverse auction
– Reverses status quo—FCC can relocate stations – Creates holdout problem in reverse auction
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auctions
Congress should provide the FCC with broad auction authority focused on key objectives
– Transparency – Efficiency – Protections to assure success
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and practice
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potential collusive behavior among bidders, all elements of the market from qualification, to bidding, to award, to performance will be publically disclosed
promote the immediate disclosure of essential market elements in simple and powerful data bases
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Put spectrum to its best use
– Often consistent with best private use, but – Adjustments to reflect divergence between social and private value, as a result
– Accommodates both selling and buying of spectrum rights – Fosters effective price and assignment discovery in a multiple round format – Has a pricing and activity rule that encourages bidders to express true preferences throughout the auction process
run efficiency
with substantial experience in a diversity of auction design settings
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Statutory language: Protections for participants
– Rigorous and open qualification to bid – Deposit proportional to expected volume as a bid guarantee
– Clear rights and obligations for buyers and sellers – Simple methods to guarantee performance for parties at risk
– To assure competition in the auction and long-run competition in the downstream market for wireless services,
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Statutory language: Protections for best practice
and practice
– Expert auction design services procured via competitive bid
science and practice
– Expert auction implementation services procured via competitive bid
– An independent expert (individual) shall be retained with four-year terms by the Chair of the FCC – Independent market monitor is not a current government employee – Independent market monitor reports directly to the Chair of the FCC – Independent market monitor has available all confidential information
– Independent market monitor reports on a regularly basis (annual report and two biannual reports) on the state of the market
– Independent market monitor is not a judge and does not make rulings
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products
the risk of winning only some of a complementary set of products
allowing bidders to bid on packages of products
the demand reduction problem in which larger bidders inefficiently reduce demand in order to win spectrum at lower prices
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– Price increased if there is excess demand – Process repeated until no excess demand
– Improve clock bids – Bid on other relevant packages
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– February 2008, 27 rounds, £16 million
– May 2008, 33 rounds, £8.3 million
– First-quarter 2012
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such that
– Efficient: Value maximizing assignment – Unblocked: No subset of bidders offered seller a better deal
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Winners Vickrey prices: p1= 14 p2= 12
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The Core b4{A} = 14 b3{AB} = 32 b5{B} = 12 b1{A} = 28 b2{B} = 20 Bidder 2 Payment Bidder 1 Payment 14 12 32 28 20
Efficient outcome
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The Core b4{A} = 14 b3{AB} = 32 b5{B} = 12 b1{A} = 28 b2{B} = 20 Bidder 2 Payment Bidder 1 Payment Vickrey prices 14 12 32 28 20
Vickrey prices: How much can each winner’s bid be reduced (while holding others fixed)?
Problem: Bidder 3 can offer seller more (32 > 26)!
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The Core b4{A} = 14 b3{AB} = 32 b5{B} = 12 b1{A} = 28 b2{B} = 20 Bidder 2 Payment Bidder 1 Payment Vickrey prices 14 12 32 28 20
Bidder-optimal core prices: Jointly reduce winning bids as much as possible (while remaining within core)
Problem: bidder-
are not unique!
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Unique core prices b4{A} = 14 b3{AB} = 32 b5{B} = 12 b1{A} = 28 b2{B} = 20 Bidder 2 Payment Bidder 1 Payment Vickrey prices 14 12 32 28 20
Core point closest to Vickrey prices (Alternative: core point closest to linear prices)
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Each pays equal share above Vickrey
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Bidders can only move toward packages that become better values
– At time t > t, package qt has become relatively cheaper than qt (P) qt(pt – pt) qt(pt – pt) – Supplementary bid b(q) must be less profitable than revised package bid at t (S) b(q) b(qt) + (q – qt)pt
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efficient assignment and supporting prices
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by raising bid by final price of unsold lots
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