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."
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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

2014

Rhymes with MILGROMESQE

arabesque, Bunyanesque, copydesk, gigantesque,

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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.

Market Design for Surface Water , by Ferguson and Milgrom

 The potential market for surface water is a market in which any transfer of rights involves externalities affecting the water consumption of others.

Market Design for Surface Water  by Billy A. Ferguson & Paul Milgrom, NBER WORKING PAPER 32010, DOI 10.3386/w32010, December 2023

Abstract: Many proposed surface water transfers undergo a series of regulatory reviews designed to mitigate hydrological and economic externalities. While these reviews help limit externalities, they impose substantial transaction costs that also limit trade. To promote a well-functioning market for surface water in California, we describe how a new kind of water right and related regulatory practices can balance the trade-off between externalities and transaction costs, and how a Water Incentive Auction can incentivize a sufficient number of current rights holders to swap their old rights for the new ones. The Water Incentive Auction adapts lessons learned from the US government’s successful Broadcast Incentive Auction.

From the introduction:

"Why is there so little water trading in California despite the heterogeneous uses and huge price differences? The consensus among many economists studying water is that much of the problem lies in an archaic system of property rights, which was perhaps simple and clear enough to function well when California was first settled, but which is dysfunctional today. We will argue below that trading in traditional water rights creates externalities, so efficiency-enhancing changes in water allocations cannot be achieved by exhausting profitable bilateral trades. Rather, it requires a coordinated, multilateral effort. The next section on the Institutional Background provides a description of water rights and the externalities that can result from trade or from certain other decisions about uses. What is most novel in this paper comes after that: we analyze a mechanism that enacts a change in water rights that could lead to much more efficient trade.

Our analysis draws on lessons learned from the US Broadcast Incentive Auction in 2016-17, in which some rights to use radio spectrum for television broadcast were combined, converted, and subdivided into more flexible rights that were better suited for wireless broadband communications. This was accomplished using an auction procedure designed to provide an “incentive” for broadcasters to participate. As in that auction, participation in an analogous Water Rights Incentive Auction could be entirely voluntary, with current water users incentivized to participate because they could trade their existing rights for new, more flexible rights and possibly additional payments as determined by an auction. Just as the Broadcast Incentive Auction achieved its goals described in the National Broadband Plan even though many broadcasters chose not to sell their rights, a Water Incentive Auction could provide the substantial benefits of more flexible water rights even if many water users decline to participate. We describe some details of a possible Water Incentive Auctions in a later section of this paper."

Comments on the FCC incentive auction

Peter Cramton writes:

Dear Al,

Yesterday, I filed at the FCC some research that my team has been working on for some time. It is a good example of market design in action, combining economics, computer science, and operations research to design better markets. I am sending this to you because I thought that you may be interested and the market design community more broadly. I paste below the link and the abstract.

All the best,

Peter

“Design of the Reverse Auction in the FCC Incentive Auction” (with Hector Lopez, David Malec and Pacharasut Sujarittanonta), Working Paper, University of Maryland, 19 February 2015. [See also FCC Comment Public Notice, EOBC Comment, Kagan Comment]

We consider important design issues of the reverse auction, a key and innovative part of the FCC’s Incentive Auction. In the reverse auction, broadcasters compete to repurpose television broadcast spectrum for mobile broadband use. The Comment Public Notice (FCC 14-191) outlined the basic structure of the reverse auction. We take that basic structure as given and then examine critical elements of the design to maximize the FCC’s objectives of efficiency, simplicity, transparency, and fairness. Based on extensive simulation analysis of the FCC’s basic design, we identify important enhancements to the design that maintain its basic structure, yet improve the chance of a successful auction. This is accomplished by strengthening incentives for broadcaster participation and relying on competitive forces to determine auction clearing prices. Our analysis is based on a carefully-crafted reservation price model for broadcasters together with inevitable uncertainties of these reservation prices. In our simulations, we are able to clear 126 MHz of spectrum at a cost that is well within plausible revenues from the forward auction. This is accomplished with an improved scoring rule and replacing Dynamic Reserve Prices (DRP) with a much simpler Round Zero Reserve (RZR, pronounced “razor”) to promote objectives of transparency and simplicity. We also propose a much simplified method of setting the clearing target and an information policy that allows for important outcome discovery. Relative to the FCC’s proposal outlined in the Comment PN, our enhanced proposal is more robust, more efficient, simpler, more transparent, and fairer.

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Here is the FCC's request for comments

Comment Sought on Competitive Bidding Procedures for Broadcast Incentive Auction 1000, Including 1001 and 1002

A Proposed Rule by the Federal Communications Commission on01/29/2015

The Auction 1000 Request for Comment initiates the pre-auction process by which the Federal Communications Commission will develop detailed procedures for the broadcast television spectrum incentive auction, taking into account public comment received in response to its proposals. The Auction 1000 Request for Commentincludes specific proposals, including on determination of the initial broadcast television spectrum clearing target, opening bid prices, benchmarks for the final stage rule, and the final television channel assignment process, and seeks comment on those proposed procedures
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Paul Milgrom et al. on the incentive auction--two recent papers, and two pictures

Two new papers and two recent pictures on the FCC incentive auction, and the cornucopia of related results (including to auctions as knapsack problems) that Paul Milgrom and his colleagues have developed:

Incentive Auction Design Alternatives: A Simulation Study
KEVIN LEYTON-BROWN, University of British Columbia
PAUL MILGROM, Stanford University
NEIL NEWMAN, University of British Columbia
ILYA SEGAL, Stanford University
February 21, 2020,
Manuscript submitted for review to the 21st ACM Conference on Economics & Computation (EC’20)

Abstract: Over 13 months in 2016–17 the US Federal Communications Commission (FCC) conducted an “incentive auction” to repurpose radio spectrum from broadcast television to wireless internet. This paper revisits from a computational perspective the descending clock “reverse” auction used to procure broadcast rights. We investigate the quantitative significance of various aspects of the design by running extensive simulations, leveraging a reverse auction simulator and realistic models of bidder values.
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Investment Incentives in Near-Optimal Mechanisms
Mohammad Akbarpour, Scott Duke Kominers, Shengwu Li and Paul Milgrom
February 25, 2020

Abstract: In a Vickrey auction, if one bidder has an option to invest to increase his value, the combined mechanism including investments is still fully optimal. In contrast, for any β < 1, we find that there exist monotone allocation rules that guarantee a fraction β of the allocative optimum in the worst case but such that the associated mechanism with investments by one bidder can lead to arbitrarily small fractions of the full optimum being achieved. We show that if a monotone allocation rule satisfies a new property called ARNIE and guarantees a fraction β of the allocative optimum, then in the equilibrium of the threshold auction game with investments, at least a fraction β of the full optimum is achieved. We also establish generalizations and a partial converse, and show that some well-known approximation algorithms satisfy the ARNIE property.

"ARNIE (“avoiding relevant negative investment externalities”)
...
"The definition of ARNIE is as follows: Given any value profile and feasibility constraints, an algorithm outputs some set of packed bidders. Suppose we raise the value of a packed bidder, or lower the value of an unpacked bidder, and then run the algorithm at the new value profile. The algorithm is ARNIE if the new packing, assessed at the new values, yields at least as much welfare as the old packing, assessed at the new values."

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And here are two photos I snapped during a seminar Paul gave two weeks ago...

See my previous posts containing "incentive auction".

FCC Adopts Rules for Incentive Auction

Here's the news from the FCC:

"The Federal Communications Commission today adopted rules to implement the Broadcast Television Incentive Auction. The two-sided auction will use market forces to recover spectrum from television broadcasters who voluntarily choose to give up some or all of their spectrum usage rights in exchange for incentive payments, in order to auction new spectrum licenses to wireless providers."

May 15, 2014 - News Release

FCC Adopts Rules for First Ever Incentive Auction

- Related Upcoming Proceedings

- Staff R&O Summary

- Wheeler Statement

- Clyburn Statement

- Rosenworcel Statement

- Pai Statement

- O'Rielly Statement

and here's a news story: The 4G incentive auction rules are set, and a lot of people aren’t happy with them.

Here's my previous post on the incentive auction... 

Paul Milgrom wins the BBVA Foundation Frontiers of Knowledge Award

This morning Spain's BBVA Foundation announced that Paul Milgrom has one the Frontiers of Knowledge Award in Economics, Finance and Management.

In the accompanying video interview Paul cites Vickery and Wilson as his inspirations, and goes on to talk briefly about his current work on the FCC incentive auction, and how it has to be designed to satisfy the engineering constraints imposed by broadcasting, while being simple enough for bidders and addressing the revenue and efficiency concerns of the FCC.

Here is the prize announcement:

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The BBVA Foundation Frontiers of Knowledge Award in the Economics, Finance and Management category goes in this fifth edition to U.S. mathematician Paul Milgrom “for his seminal contributions to an unusually wide range of fields of economics including auctions, market design, contracts and incentives, industrial economics, economics of organizations, finance, and game theory,” in the words of the prize jury. This breadth of vision encompasses a business focus that has led him to apply his theories in advisory work with governments and corporations.

Milgrom (Detroit, 1948), a professor of economics at Stanford University, was nominated for the award by Zvika Neeman, Head of The Eitan Berglas School of Economics at Tel Aviv University.

 “His work on auction theory is probably his best known,” the citation continues. “He has explored issues of design, bidding and outcomes for auctions with different rules. He designed auctions for multiple complementary items, with an eye towards practical applications such as frequency spectrum auctions.”

Milgrom made the leap from games theory to the realities of the market in the mid 1990s. He was dong consultancy work for Pacific Bell in California to plan its participation in an auction called by the U.S. Federal Communications Commission, and was able to pinpoint errors in the auction design that produced a worse outcome for both organizers and bidders. He and Robert Wilson proposed an alternative method which the FCC agreed to try out. Their innovation, known as the simultaneous multiple round auction (SMR), replaced the traditional sealed envelope with an open bidding format, in which each company could observe what the rest were offering, supplemented by rules to prevent monopoly pricing. The auction – of electromagnetic spectrum for what was then the new generation of cell phones, pagers, and other wireless communication devices – raised the record sum of over seven billion dollars, and testified in the most practical way possible to the value of games theory in strategic decision-making.

SMR has since been used by governments the world over to auction not only airwaves but also natural gas, electrical power, etc.

Shortly after being informed of the Frontiers of Knowledge Award, Milgrom explained how this contribution came about: “I started out studying mathematics, but then moved to Stanford to study business and discovered the work of William Vickrey, who went on to win a Nobel prize for his work on auction theory. I was fascinated by this kind of mathematical approach to human behavior, and decided that was what I wanted to explore.”

Asked what makes the auction such an important mechanism, he replies: “Auctions determine how resources are shared out, they decide who gets what and at what price, at times even a lot of goods being offered simultaneously. They are important for the same reason that markets are important. Initially, no one can know what a given object is worth to each of its possible buyers, and we need a mechanism that gives us that information; a competition so buyers can show their interest through bidding and the resources go to the highest bidder, but also so resources end up in the hands of those who will put them to good use.”

Milgrom developed SMR to make this competitive process more efficient, as well as adaptable to non-price bidding mechanisms such as placing students into college courses, or reallocating airline slots in the event of bad weather at a crowded airport.

Auctionomics, the firm he created as an outlet for his research findings, has been engaged by regulators in the United States, United Kingdom, Canada, Australia, Germany and Mexico to advise on the design of auctions in strategic sectors.

This advisory role extends to both the organizers of auctions and those wishing to bid: “We help auction organizers to design them better. Normally the big challenge is to attract bidders. The auction has to be simple and easy to understand, but at the same time respect the complexities inherent to each situation, including technical and other constraints. If the client is a buyer, we help them understand the rules of the auction and think ahead to how much money they might need, what they can hope to get at what price, and what they can expect from competitors.” The technical guidance the firm provided to Comcast in a radio spectrum auction saved this client nearly $1.2 billion on its license purchases based on the prices paid by other large bidders.

Milgrom’s company is currently advising FCC on the incentive auction through which the Commission plans to reallocate part of the spectrum used for TV broadcasting to telephone operators, in an operation likely to be worth around 55 billion dollars.



Industrial organization

The jury also refers to another of the new laureate’s lines of work: “Professor Milgrom’s research in industrial organization includes influential studies on limit pricing, entry deterrence, predation, and advertising.”

Best known perhaps are his reflections on the complementarities between a company’s strategy and organizational design, and on the design of incentives for workers in multitask jobs.

His theoretical insights in this field were brought together in the 1992 publication Economics, Organization and Management, co-authored with John Roberts and now a standard textbook in schools of economics throughout the world.

“When I teach my students theory, I encourage them to challenge me by asking me how it is useful. It’s healthy for them to ask, and it’s not hard for me to answer because I always have real-world examples in mind when I am working on my theories,” Milgrom observes.

And here too his ideas have found a home in the corporate sector, where he has advised Google on its IPO auction of shares, Yahoo! on the design of an advertising market and Microsoft Networks on sponsored search auctions.

Talking about the Google launch, Milgrom explains: “When companies are preparing an initial public offering, they think about investment banks and other strategies, they never think about it as an auction. Google wanted to do things differently. They wanted to design an auction that was inviting for clients who were not versed in financial markets, and also to know the risks involved.”

“In addition, Milgrom has added important novel insights to finance, particularly in connection to speculative trading and market micro-structure. The common theme of his works on auctions, industrial strategies, and financial markets is that economic actors infer from prices and other observables information about the fundamental market values,” according to the award certificate.

The jury also highlighted the laureate’s contribution to agency theory “by describing conditions under which linear incentives are optimal, and by developing a tractable mode of multitask agency relationships. His work in contract and organization theory has been very influential in management science.” Finally, it concluded, “Professor Milgrom has contributed to mathematical economics and game theory, with studies on reputation and adaptive learning.”



Bio notes

Paul Milgrom (Detroit, Michigan, 1948) completed a BA in mathematics at the University of Michigan, before moving to Stanford, where he specialized in statistics and earned a PhD in business. He began his research and teaching career at Northwestern University (Illinois), where he would later occupy a series of professorial posts. In 1987, after five years at Yale, he returned to Stanford University, where he is currently the Shirley and Leonard Ely Professor of Humanities and Sciences, as well as professor by courtesy in the Stanford Graduate School of Business.

His scientific papers and books have been cited more than 53,000 times, according to Google Scholar. He had occupied editorial positions at international journals including American Economic Review, Econometrica and Journal of Economic Theory, and is a fellow of the Econometric Society and a member of both the U.S. National Academy of Sciences and the American Academy of Arts and Sciences.



International jury

The jury in this category was chaired by Kenneth J. Arrow, Nobel laureate in Economics and Professor of Economics and of Management Science and Engineering, Emeritus, at Stanford University (United States), with José Manuel González-Páramo, Visiting Professor at IESE Business School (Spain), acting as secretary. Remaining members were Andreu Mas-Colell, Professor of Economics at Pompeu Fabra University (Spain); Joel Mokyr, Robert H. Strotz Professor of Arts and Sciences and Professor of Economics at Northwestern University (United States); Albrecht Ritschl, Professor of Economic History at the London School of Economics (United Kingdom); and Jean Tirole, Chairman of the Board of the Fondation Jean-Jacques Laffont at Toulouse School of Economics (TSE)and Scientific Director of Toulouse University’s Institute for Industrial Economics (France)
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Here's the Spanish press release.

FCC incentive auction

USA Today covers the earliest stage of the FCC's incentive auction: FCC's complex incentive auction could net more than $30 billion

"The most sophisticated and complex spectrum auction ever conducted by the Federal Communications Commission is officially underway.

"When the entire process comes to an end more than three years from now, big wireless carriers that provide most of our smartphone access should have more bandwidth to delivery services to mobile-hungry consumers.

"TV broadcasters by Tuesday night must have made official their intentions to accept the FCC's opening price for the rights to the spectrum they currently use for digital TV broadcasts. Once the agency knows how much spectrum can be made available in this "reverse auction," then, in a few months, the FCC will open up the bidding in the "forward auction" in which companies such as AT&T and Verizon can bid on the reallocated spectrum in each of 400-plus localities."

FCC receives Edelman award for incentive spectrum auction

Advancing wireless communication: FCC awarded the 2018 INFORMS Edelman Award, the leading award in analytics and operations research

"The FCC conducted the world’s first two-sided “Incentive Auction” to meet the exploding demand for wireless services by reclaiming valuable low-band electromagnetic spectrum from TV broadcasters. By purchasing spectrum from TV broadcasters and reselling it to wireless providers, the auction repurposed 84 MHz of TV spectrum for mobile broadband, next-generation “5-G,” and other wireless uses, raised nearly $20 billion in revenue, and contributed over $7 billion to reduce the federal deficit. In addition, operations research enabled many TV stations to remain on their original channels, saving an estimated $200 million in relocation costs.  "
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I have written quite a number of posts focusing on the incentive auction, and on the dream team led by Paul Milgrom; here's one of the first:

Monday, April 21, 2014

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

The FCC Spectrum Incentive Auction: conference at Duke

Here's a chance to hear about one of the most exciting auctions of modern times...

The FCC Spectrum Incentive Auction: Lessons for the Future

Friday, May 12, 2017, 8:30 a.m. - 1:30 p.m.
Duke University's "Duke in DC" offices
1201 Pennsylvania Avenue, NW, Suite 500 | Washington, DC 20004

The FCC is concluding the most complex auction in history, the culmination of a decade-long planning process for moving spectrum from broadcast to mobile broadband uses. On the morning of May 12, The Center for Innovation Policy at Duke Law will hold a half-day conference that will identify lessons from this auction for spectrum policy, government disposition of assets (whether of spectrum or other resources), and the future of innovation policy generally. The conference will be at Duke in DC, 1201 Pennsylvania Ave., NW, Suite 500, Washington, DC. The program is free and open to the public; due to limited space, registration is required (see the link below).

Speakers include: Lawrence Ausubel, Univ. of Maryland, Power Auctions; Jonathan Chaplin, New Street Research; Paul de Sa, Quadra Partners; Gary Epstein, FCC; Karla Hoffman, George Mason Univ.; Allan Ingraham, Economists Inc.; Edward Lazarus, Tribune Media; Michael Ostrovsky, Stanford Graduate School of Business; Preston Padden, Boulder Thinking; Charla Rath, Verizon; Dorothy Robyn, former Commissioner at GSA; Gregory Rosston, Stanford Univ.; David Salant, Auction Technologies; Steve Sharkey, T-Mobile; and Ilya Segal, Stanford Univ.

PRELIMINARY AGENDA

8:30 AM	Introduction
8:35 AM	Auction Design
9:45 AM	Auction Implementation
11:15 AM	Auction Participation and Future Directions
12:30 PM	Adjourn

Economics and computer science of a radio spectrum reallocation in the PNAS

A PNAS article on the recent incentive auction, by its design team.

Economics and computer science of a radio spectrum reallocation
Kevin Leyton-Brown, Paul Milgrom, and Ilya Segal
 Early Edition >  doi: 10.1073/pnas.1701997114

Abstract
The recent “incentive auction” of the US Federal Communications Commission was the first auction to reallocate radio frequencies between two different kinds of uses: from broadcast television to wireless Internet access. The design challenge was not just to choose market rules to govern a fixed set of potential trades but also, to determine the broadcasters’ property rights, the goods to be exchanged, the quantities to be traded, the computational procedures, and even some of the performance objectives. An essential and unusual challenge was to make the auction simple enough for human participants while still ensuring that the computations would be tractable and capable of delivering nearly efficient outcomes.

Conflict of interest statement: P.M. led the team of consultants on behalf of Auctionomics, which was responsible for advising the Federal Communications Commission on the design of the incentive auction. K.L.-B. and I.S. were the two other members of the Auctionomics consulting team.

Will satellite companies sell C-Band spectrum by auction?

Auctionomics, the auction design company founded by my colleague Paul Milgrom, has been working with satellite broadcasters Intelsat (NYSE: I), SES (Euronext Paris: SESG), Eutelsat (Euronext Paris: ETL) and Telesat (the C- Band Alliance) to auction some of the rights to their C-Band spectrum.  Here's a press release

C-Band Alliance Filing on Proposed Commercial Auction Process

and here's a Bloomberg story:
Intelsat, SES Unveil Design for Private Sale of 5G Airwaves

It appears that the proposed auction is modeled on the FCC's incentive auction that repurposed some television broadcast spectrum licenses.  See my last year's post

Wednesday, June 13, 2018

The incentive auction (for radio spectrum) in three videos

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Update: the white paper, FUEL for 5G: Flexible Use and Efficient Licensing can be found here, preceded by a cover letter to the FCC.

Golden Goose Award to Preston McAfee, Paul Milgrom and Bob Wilson

One of the 2014 Golden Goose Awards recognizes the spectrum auction work of Preston, Paul and Bob.

Of Geese and Game Theory: Auctions, Airwaves – and Applications

By Golden Goose Award | Published: July 17, 2014

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Social scientists and now Golden Goose awardees: Preston McAfee, left, Paul Milgrom and Robert Wilson

What’s the connection between social sciences research on game theory and your ability to make calls from your cellphone anywhere in the country, watch your favorite cable TV show, find a good restaurant anywhere in the world, or live stream the “big game” on your smartphone? Meet Robert Wilson, Paul Milgrom, and Preston McAfee, whose basic theoretical research on game theory and auctions, much of it federally funded, eventually helped the Federal Communications Commission figure out how to allocate the nation’s telecommunications spectrum through sophisticated, enormously complex auctions.

The story begins with Robert Wilson, a Stanford University economics professor who earned his undergraduate degree and his Ph.D. at Harvard University. Wilson has always had a strong interest in game theory, including how it applies to formulating auctions for maximum results. Game theory uses mathematical models to study how people and organizations make decisions. It is highly theoretical but over time has had significant applications. Early in his career, in the 1960s, Wilson’s research was supported by the U.S. Atomic Energy Commission (AEC). The AEC cared little about the specific topic of Wilson’s research – auctions. As he notes today, few people did. What the AEC really cared about was advancing the field of game theory. At the time, this was obscure, curiosity-inspired basic research, supported by the federal government.

Wilson also conducted research in the 1970s for the Office of Naval Research, which wanted to improve the bidding process for contractors to construct naval ships. Eventually, in the 1980s and 1990s, Wilson’s continuing game theory research on auctions and other economic transactions would be supported by the National Science Foundation.

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Robert Wilson, Paul Milgrom and Preston McAfee are the second set of Golden Goose winners announced this year. Sponsored by a coalition of academic, business, and scientific groups, with the active encouragement of some members of Congress, the Golden Goose Awards honor scientific researchers whose U.S. government-funded studies might have seemed strange, odd, impractical or wasteful at the time but which paid solid dividends — “major economic or other benefits to society” — in subsequent applications. Recipients are selected by a panel of scientists and researchers.The third annual Golden Goose Awards ceremony takes place in Washington, D.C., on Sept. 18. For more on the the Gooseys and this year’s earlier winner, click here.

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As an undergraduate mathematics major at the University of Michigan, Paul Milgrom was inspired by the work of Nobel Prize winner William Vickrey, a pioneer in fundamental auction theory, who conducted his research in this area at Columbia University.

After several years of working as an actuary, Milgrom attended graduate school at Stanford where Robert Wilson served as his faculty adviser. The subject of Milgrom’s Ph.D. dissertation in economics was, no surprise, auction theory. Milgrom went on to conduct further research on auction theory at Northwestern University, where his work addressing the unique, but still highly speculative and theoretical, issues arising from simultaneous auctions of multiple items was supported by the National Science Foundation. A 1982 Milgrom paper on single-item auctions is still considered the state of the art. Ironically, a 1981 paper on multi-item auctions was not accepted for publication until 1999.

In 1993, in part to raise additional revenue, Congress granted the Federal Communications Commission authority to conduct auctions to allocate portions of the “spectrum,” which is the range of electromagnetic radio frequencies used to transmit sound, data, and video across the country. It carries voice between cell phones, programing from broadcasters to your TV, and all types of data wirelessly over the Internet. The FCC’s goal was to create market efficiency to ensure the most effective possible development of consumer markets for communications and media.

Auctions may seem fairly straightforward, but they are far from it. Government auctions in particular need to account both for bidders’ varying needs and for their gaming strategies. And this was an extremely complex undertaking, as some companies would want to create large interstate networks, while some wished to serve smaller regional markets. The process needed to ensure both fairness and efficiency, and ensure competitive markets for consumers. And it would be very difficult to estimate the actual value of what was being sold. It was a simultaneous auction of multiple items (multiple frequency bands in different geographic locations), the kind of auction Milgrom had studied in theory. In this instance, however, the policy and economic stakes were large and not at all theoretical.

The FCC issued a “notice of proposed rulemaking” that suggested a process for the first auction. To ensure efficient allocation, the auction would need to be designed to ensure that bidder behavior revealed the worth and value of individual elements or a “package” of the spectrum.  The FCC notice was intended to provide that framework.

It contained considerable information about auctions, including scholarly work. Among the likely bidders was Pacific Bell, the telephone company serving California. When PacBell attorneys saw that Paul Milgrom’s work was cited as a basis for the impending auction, they contacted him to ask for his advice about bidding. When Milgrom saw the FCC’s proposal, he told PacBell that he could design a far better auction that would be both fair and improve efficiency. He went to his old thesis adviser, Robert Wilson, and together they developed an auction process called a simultaneous multiple round, or SMR, auction, also known as a simultaneous ascending-bid auction.

A similar idea was independently proposed by Preston McAfee, at the time an economics professor at the University of Texas and currently chief economist of Microsoft, who was consulting for Pacific Telesis. While McAfee is an American, his early work on auctions, much of it conducted with John McMillan of Stanford and the University of California at San Diego, had been funded by the Canadian government. This work was also highly theoretical, but McAfee was a strong advocate that economic theory should be applied to solving practical problems.

The FCC, knowing that this was uncharted territory, welcomed academic proposals for improving the auction. The FCC asked the three economists to work together, and they designed the first auction. While Wilson and Milgrom contributed the fundamental idea that all of the individual auctions should conclude simultaneously, McAfee’s work was especially important for dealing with other practical issues, such as how to address defaults by bidders and how to ensure participation by women- and minority-owned businesses. (Interestingly, PacBell and Pacific Telesis were in the midst of a corporate “divorce,” so McAfee and the other two economists could communicate with each other only through the FCC.)

Designing and implementing a novel auction method in the given time frame would have been nearly impossible without the foundation laid by the research conducted over the years by Wilson, Milgrom, McAfee and others. That first auction, which occurred in 1994, was a success and SMR auctions have been the method used for dozens of spectrum auctions in the U.S. and around the world, many supported by a company formed by Wilson, Milgrom, McAfee, and McMillan. Indeed, Paul Milgrom is working with the FCC on what will likely be its most complex auction yet – an “incentive” auction, planned for 2015, designed to meet the nation’s changing communications needs and technologies by encouraging the repurposing of spectrum currently controlled by television broadcast networks.

In addition to the FCC auctions, SMR auctions have been used to auction commodities as diverse as gas stations, airport slots, telephone numbers, fishing quotas, emissions permits, and electricity and natural gas contracts.

The FCC has conducted 87 spectrum auctions and has raised over $60 billion for the federal government, while also providing a diverse offering of wireless communication services to the public. These auctions have been called collectively the greatest auction in history.

The economic activity they have made possible, and the changes they have made in the way Americans live, seem incalculable – and not at all theoretical. Game theory has come a very long way indeed.

Here's my golden goose post from before the ceremony last year (and here from after, with a video), when I shared the award with David Gale and Lloyd Shapley, and here's a picture of the goose itself (you have to figure out which one is the goose).

Paul Milgrom on the history of spectrum auctions

How obscure science led to spectrum auctions that connected the world
BY PAUL MILGROM,  04/30/17 07:00 AM EDT

"The incentive auction I helped design is an innovation building on decades of economic theory research on auctions dating back to the Nobel-prize winning work of William Vickrey and to work by my own research advisor, Robert Wilson, in the 1960s with funding from the Atomic Energy Commission. What interest did this Cold War era agency have in theoretical auctions? Well, nothing, but they were highly interested in advancing the field of game theory – a then obscure branch of mathematics used in economics that aims to understand how individuals strategize and act in competitive situations.


Over more than 30 years, Wilson, I, and others continued to advance this seemingly esoteric field, until the FCC issued its first proposed rulemaking on developing a spectrum auction that referenced our work. Together with Preston McAfee, who had independently been developing similar ideas, we worked with the FCC to design the first spectrum auction in 1994. The simultaneous multiple round auction we invented has since been used for dozens of spectrum auctions here and around the world. Collectively, these have been called the greatest auction in history, delivering more than $60 billion for the federal government since the early 1990s and enabling the robust wireless communications we enjoy today.

In 2014, the three of us received a Golden Goose Award for our work in this obscure field of social science and its unexpected application to spectrum auctions. None of us envisioned such an auction when we began our study, we were driven by a curiosity in human behavior and markets, not data flying around the country. But the auctions we designed have nonetheless helped change the way we all communicate, consume media, and do our work.

The auction that closed last month was the first of its kind, both because it was two-sided, engaging both TV broadcasters as sellers and mobile operators as buyers, bidding in a single auction, and because the choices of which TV broadcast rights to buy and how to reassign continuing broadcasters needed to respect more than a million constraints to avoid interference among uses. Designing such a complex process brought together a new generation of researchers in both economic and computer science.

When the dust had settled, we were able to repurpose channels 38-51 from broadcast TV uses to free 70 megahertz of spectrum for the growing mobile broadband sector (plus 14 megahertz for wireless microphones). This will enable continuing innovation in broadband and bring better coverage to rural communities. The auction also raised nearly $20 billion in revenue, with more than $7 billion to federal coffers to be used for debt reduction.

Our work on auction design is just one example of how research that may sound obscure or even silly has often benefited society. The Golden Goose Award was founded five years ago to celebrate stories like ours, and it has recognized colleagues of mine like Al Roth whose studies of how to make perfect marriage matches now informs medical residency assignments and kidney exchanges, among many other researchers. In each case, a small investment of federal money returned huge benefits to our nation. And all led to outcomes the researchers never would have predicted when they started."

Paul Milgrom corrects the record on spectrum auctions and market design

Paul Milgrom responds in detail to some scurrilous online criticisms and innuendos about market designers in general and spectrum auctions in particular.

 The Market Design Community and the Broadcast Incentive Auction: 
Fact-Checking Glen Weyl’s and Stefano Feltri’s False Claims
By Paul Milgrom*  June 3, 2020 (and republished on Digitopoly on June 14)

"In a recent Twitter rant and a pair of subsequent articles in Promarket, Glen Weyl [1] and Stefano
Feltri [2] invent a conspiratorial narrative according to which the academic market design community is secretive and corrupt, my own actions benefitted my former business associates and the hedge funds they advised in the 2017 broadcast incentive auction, and the result was that far too little TV spectrum was reassigned for broadband at far too little value for taxpayers.
The facts bear out none of these allegations. In fact, there were:

• No secrets: all of Auctionomics’ communications are on the public record,
• No benefits for hedge funds: the funds vigorously opposed Auctionomics’ proposals, which reduced their auction profits,
• No spectrum shortfalls: the number of TV channels reassigned was unaffected by the hedge funds’ bidding, and
• No taxpayer losses: the money value created for the public by the broadband spectrum auction was more than one hundred times larger than the alleged revenue shortfall.
...
[read the rest to get the facts...]

[1] “It Is Such a Small World: The Market-Design Academic Community Evolved in a Business Network.” Stefano Feltri, Promarket, May 28, 2020.
[2] “How Market Design Economists Helped to Engineer a Mass Privatization of Public Resources.” Glen Weyl, Promarket, May 28, 2020.