Before that, I’ll re-request you to buy the book and give it a read.
This particular case study speaks about the 3G Spectrum Auction that was held in UK in 2000. Three years prior to the auction, economists Ken Binmore and Paul Klemperer were assigned the job of tailoring the auction for UK - a decision that paid the government handsomely. The auction was a huge success with earnings of about £23 Billion (2.5% of GNP), all most eight times the initial estimate of £3 Billion.
I have never really appreciated the beauty of economics until I came across this auction and its outcome. An adaptation of simultaneous ascending design was employed, where in, all the licenses were auctioned simultaneously with a bidder bidding for only one license. The winner is not decided until only one bidder is left for the particular license and the price being the last bid.
The economics of the auction - since there were already four incumbents of the 2G telecom industry as potential bidders, and with the engineering team’s initial promise of four licenses, it was feared that the incumbents would be the obvious winners (for less price/bid) owing to the established market and telecom infrastructure for 2G. Obviously, this forethought would have been thought to be a discouragement to the new entrants to bid in the auctions had there been only four licenses and hence a different untested strategy would have been considered.
But later when a fifth license was also being promised, it was possible for a new entrant to purchase a license (this license was apparently a good one, second largest bandwidth among the five). And since prices always get decided marginally, the marginal bidding (the bidding for the fifth license in this case) made sure that the bids increase for all the licenses in each round. How it works is, when the new entrants are given a fair opportunity to get a license, it gave them an incentive to bid aggressively owing to the fact that they have nothing to lose (the initial deposit was refundable in the event of losing). And with that the incumbents always had to bid higher in each round for their respective target licenses in order to ensure participation in the auction. So what ensued was a tiresome auction (for the economists who designed it) which began on 6th March 2000 and went on till 27th April 2000, with 150 rounds, until the second bidders for all the licenses backed out leaving the winners to claim their prize. All the four incumbents did manage to secure themselves a license each but at a very high price. Like I said, it worked out pretty well for the government.
This left me thinking as to what might be a possible loophole-free design for India’s 3G auction. Now, the auction is around the corner and no one really knows how far down the timeline does that indicate. However, with a reservation for the new entrants in case the number of licenses is more than the incumbents in India or a simple ascending design (with a company allowed to bid for only one license) if the number is less than the number of incumbents planning to bid should work out in the favour of the government. Vodafone, Airtel, Reliance, Cellone and Tata Indicom are the India’s major cellular service provider with other major regional providers like Aircel in Tamil Nadu, Idea in North India, Dolphin in Mumbai etc. And since the number of incumbent bidders per state would be more than the licenses available for bidding in that state, the second design would seem apt. I can only anticipate as far as this, I am looking forward to the auction.
On a lighter note, regarding auctions, apparently in 193 AD the Praetorian assassins auctioned the roman throne and the winner was a Praetor by the name of Didius Julianus. Sweet huh?!
