Monday, April 21, 2014

The FCC's upcoming incentive auction, and I propose a new adjective (Milgromesque)

I've blogged before (here) about the FCC's incentive auction being designed by Paul Milgrom and the team he's assembled at Auctionomics. Now it's on the FCC blog, in a post that makes me think we may need to introduce a new adjective into market design. But first, here's the FCC post:

 Getting the Incentive Auction Right, by: Tom Wheeler, FCC Chairman

"Few FCC policies have generated more attention than the Incentive Auction. “Groundbreaking,” “revolutionary,” and “first-in-the-world” are just a few common descriptions of this innovative approach to making efficient, market-driven use of our spectrum resources.

Such attention is warranted. The Incentive Auction is a once-in-a-lifetime opportunity to expand the benefits of mobile wireless coverage and competition to consumers across the Nation – particularly consumers in rural areas – offering more choices of wireless providers, lower prices, and higher quality mobile services.

Spectrum is a finite public resource, and refers to the public airwaves that carry all forms of wireless communication Americans use every day. Twenty-first century consumers in both rural and urban areas of our country have a seemingly insatiable appetite for wireless services, and thus, for spectrum.

Getting the Incentive Auction right will revolutionize how spectrum is allocated. By marrying the economics of demand (think wireless providers) with the economics of current spectrum holders (think television broadcasters), the Incentive Auction will allow market forces to determine the highest and best use of spectrum.

More immediately, the Incentive Auction will deliver tremendous benefits for U.S. consumers across the country.

In developing such an auction, we must also be guided by the rules of physics. Not all spectrum frequencies are created equal. Spectrum below 1 GHz – such as the Incentive Auction spectrum – has physical properties that increase the reach of mobile networks over long distances. The effect of such properties is that fewer base stations and other infrastructure are required to build out a mobile network. This makes low-band particularly important in rural areas. A legacy of earlier spectrum assignments, however, is that two national carriers control the vast majority of low-band spectrum. As a result, rural consumers are denied the competition and choice that would be available if more wireless competitors also had access to low-band spectrum.

Low-band physics also makes this slice of spectrum essential in urban areas, since it permeates into buildings better than does high-band spectrum. With more and more Americans opting for wireless-only connectivity, they should not run the risk of being unable to place a 911 call from the interior of a building just because their wireless company has the wrong spectrum.

While many factors go into determining the quality of wireless service, access to a sufficient amount of low-band spectrum is a threshold requirement for extending and improving service in both rural and urban areas.

As part of the Incentive Auction process, we will also make available on a nationwide basis spectrum for unlicensed use (think Wi-Fi). With the increased use of Wi-Fi, this spectrum has also become congested. Opening up more spectrum for unlicensed use provides economic value to businesses and consumers alike.

Whether television broadcasters participate in the Incentive Auction will be purely voluntary, but participation in the Incentive Auction does not mean they have to leave the TV business. New channel-sharing technologies offer broadcasters a once-in-a-lifetime opportunity for an infusion of cash to expand their business model and explore new innovations, while continuing to provide their traditional services to consumers. We will ensure that broadcasters have all of the information they need to make informed business decisions about whether and how to participate.

Yesterday, I provided my fellow Commissioners a draft Report and Order that will determine many significant issues and policy decisions related to the Incentive Auction. The Commission will also make additional decisions to implement details pertaining to the Incentive Auction in the coming months.

Reaching this stage is a major accomplishment, and was only possible thanks to outstanding work of public servants from across the FCC.

A policy that has never been tried before comes with the perception of risk. We all know, however, that risk is the partner of reward. I will continue working with my fellow Commissioners, FCC staff, and all other interested parties to minimize the risk and maximize the reward of the Incentive Auction. I am confident we will get this right, and the rewards will be great for all Americans."

Now for that new adjective, prompted by the first sentence of chairman Wheeler's post:

Mil·grom·esque: adjective. of or related to market design. “Groundbreaking,” “revolutionary,” and “first-in-the-world.”

First Known Use of MILGROMESQE



Update: Paul Milgrom writes (in an email whose subject line is "Evan Kwerel"):

Hi Al:
Thanks for your friendly review of the incentive auction, but while I am excited about my role as the consulting team leader, you give me far too big a share of the credit. And, I don't even mean the contributions of the amazing professors on my Auctionomics team -- Jon Levin, Ilya Segal and Kevin Leyton-Brown -- without their huge contributions, our part of this project would not be possible. What they have done is very important, but among the many folks in and out of the FCC who have contributed to this enormous project, the biggest economics hero is Evan Kwerel, who not only had the vision and chutzpah to push for a full market solution to the problem of spectrum reallocation, but also the insight to get the property rights settled in a way that enables competition among broadcasters who offer to relinquish their their broadcast licenses for cash.
The property rights are an absolutely essential and widely under-appreciated part of this story! Until 2012, there was disagreement and confusion about what rights the broadcasters had to their licenses: Did they own them? Could the FCC cancel the licenses or allow them to expire? What rights did the licensees have? In that situation, endless legal and political battles could have delayed the urgently needed spectrum reallocation for years or even decades. Instead, Evan Kwerel's vision included a political solution by which broadcasters would get the right to SOME channel in their home band (UHF or VHF), but not to their particular channel. That way, if the FCC eventually clears channels from Y to Z nationwide for wireless broadband, it can do so either by buying those rights or by buying broadcast rights from broadcasters in lower numbered channel from X to Y-1 and and retuning the broadcasters in the higher channels to use the newly available lower channels. There are lots more details to this because the engineering problems are hard ones, but the core fact is that this definition of rights makes an auction possible, and creates the possibility of a Pareto improvement with voluntary transfers of licenses. Nothing in the whole design is more important than this!
Incidentally, the political deal built into the 2012 legislation also provides a retuning fund of up to $1.75 billion to pay broadcasters who must change to another channel, plus protection to ensure that the new channel is as good for reaching viewers as the old one. The whole structure sets the stage for a Pareto improvement. If we can solve the challenges that this auction poses, I'm hopeful that it may eventually live up to the hype it is getting.

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