Market-Based Forces and the Radio Spectrum

1. Market Based Forces and the Radio Spectrum By Mark Bykowsky, Kenneth Carter, Mark Olson, andWilliam Sharkey Federal Communications Commission NSMA Spectrum Management Conference May 20, 2008

2. Background and Problem • The FCC employs an administrative process to determine whether spectrum should be designated to either licensed or unlicensed operations. • This process is very contentious: • FCC may be accused of picking “winners” and “losers.” • Estimating social value of a licensing regime is difficult because parties have incentive to exaggerate its value. • The issue is encountered repeatedly: • Advanced Wireless Service 3, • Broadcast TV “White Space,” and • Broadband Market Structure Implications. Office of Strategic Planning and Wireline Competition Bureau

3. Tragedy of the Commons • The possibility that spectrum users may fail to take into account the negative effect of their spectrum consumption decisions on the value other users place on employing spectrum results in a possible negative externality. • In the presence of the negative externality, the equilibrium outcome involves over-consumption of unlicensed spectrum, compared to consumption amount that would maximize the financial value society obtains from unlicensed spectrum Office of Strategic Planning and Wireline Competition Bureau

4. Pure Engineering Solution: Sub-optimal • Even if there is no congestion, the pure engineering solution may misallocate resources. • The efficient allocation of resources requires balancing the incremental benefits and costs of increasing transmission power. • Measures of each may be best provided by price signals. • A market mechanism is the best method of obtaining such signals. Office of Strategic Planning and Wireline Competition Bureau

5. Plan of This Research • Define an economic environment (e.g. spectrum uses choosing between licensed and unlicensed spectrum; service providers choosing whether to acquire licensed versus unlicensed spectrum) • Identify both the efficient and the (Nash) equilibrium allocations of spectrum to competing users in the underlying problem • Assign human subjects a “role” (e.g., spectrum user) and some “characteristics” (e.g., capacity utilization preferences, spectrum demand, preference for licensed or unlicensed use) • Use financial payments to motivate subject behavior • Compare theoretical predictions to the observed experimental outcomes Office of Strategic Planning and Wireline Competition Bureau

6. Congestion Experiments(WP 41 and 42) • Subjects must make a decision whether to use either a “Free” spectrum service that is subject to congestion or a non-congestible “Subscription” spectrum service. • Each party knows: • The level of his/her demand • The number of possible spectrum users • The price of the subscription service (e.g., price = 40) • The value (V) he/she places on sending a message • His/her congestion tolerance • Payoffs: • If Subscription: Payoff i= Vi – Fee • If Free: Payoff i = Vi congestion ≤ his/her congestion tolerance Office of Strategic Planning and Wireline Competition Bureau

7. Alternative Congestion Etiquettes • Co-existence • Do not exclude any user • Everyone contests for spectrum • Pay to connect • Subjects pay a positive but possibly nominal amount to be served • Randomization approaches • Simple randomization: users are served in random order until total demand exceeds acceptable limits • Informed randomization: users first report their personal congestion tolerance, and then users are assigned service so that all high priority users receive satisfactory quality • Priority based on reported willingness to pay • Users are served in order of reported willingness to pay Office of Strategic Planning and Wireline Competition Bureau

8. Experimental Results and Nash Equilibrium Predictions Office of Strategic Planning and Wireline Competition Bureau

9. Creating an Auction Mechanism for Licensed vs. Unlicensed Spectrum(WP 43) Frequency Block #1 Block #2 Block #3 Block #4 Office of Strategic Planning and Wireline Competition Bureau

10. Auction Mechanism • Bidders who desire licensed (fully private) spectrum, bid as in current auctions by placing “L-type” bids • Bidders who prefer to have spectrum designated to unlicensed use place “U-type” bids, which will be subsequently aggregated. • The highest L-type bid is compared to the sum of the U-type bids. • Comparison not only determines the auction winners, but also the use to which spectrum is designated. Office of Strategic Planning and Wireline Competition Bureau

11. L - Bidder for 1st Block L - Bidder for 2nd Block U - Bidder for 1st Block U - Bidder for 2nd Block Subject Valuations Value 400 300 A A 200 B A B 100 C D C D E F E F G H 400 300 250 200 120 120 80 80 60 60 40 G H Spectrum Blocks Office of Strategic Planning and Wireline Competition Bureau

12. Auction Simulation Office of Strategic Planning and Wireline Competition Bureau

13. Supply L - Bidder for 1st Block L - Bidder for 2nd Block U - Bidder for 1st Block U - Bidder for 2nd Block Optimal Assignment Valuations Valuations 500 500 Supply Supply #8 #8 #1 #1 400 400 #7 #7 #6 #6 #2 #2 300 300 #1 #8 #8 #5 #5 Price #7 #7 #2 #6 #6 200 200 #5 #5 2 2 #4 #4 400 300 #4 #4 250 200 100 100 #3 #3 #3 #3 400 300 Units Units Office of Strategic Planning and Wireline Competition Bureau

14. Supply L - Bidder for 1st Block L - Bidder for 2nd Block U - Bidder for 1st Block U - Bidder for 2nd Block Type 1 Nash Equilibrium Valuations Valuations 500 500 Supply Supply #1 400 400 #2 300 300 #1 Price #3-8 #2 #3-8 200 200 2 400 250 250 100 100 Units Units Office of Strategic Planning and Wireline Competition Bureau

15. Supply L - Bidder for 1st Block L - Bidder for 2nd Block U - Bidder for 1st Block U - Bidder for 2nd Block Type 2 Nash Equilibrium Valuations Valuations 500 500 Supply Supply #1 400 400 #2 300 300 #1 Price #2 200 200 #3-8 #3-8 400 250 250 201 <200 100 100 <200 Units Units Office of Strategic Planning and Wireline Competition Bureau

16. Experimental Results Office of Strategic Planning and Wireline Competition Bureau

17. Concluding Comments • Under the examined conditions, congestion etiquettes substantially improved the efficiency with which both licensed and unlicensed spectrum was employed by users. • Under the examined conditions, a clock auction can often efficiently designate spectrum to its most highly valued use. Office of Strategic Planning and Wireline Competition Bureau

18. Thank you! Office of Strategic Planning and Policy Analysis And Wireline Competition Bureau Federal Communications Commission