Auction Theory And Design: Lessons From 3G Spectrum Rights Auctions In Europe

Overview of 3G Spectrum Rights Auctions in Europe

Find the two essays below and decide which one makes the clearer argument.

In the year 2000, there were auctions of spectrum rights for third generation mobile telephones in several European countries. These auctions generated very different amount of revenue in different countries. How can this be explained?

Auction theory as a very useful brunch of game theory is of the great interest of modern economists. Among other reasons of its popularity stands direct importance of its ideas to modern businesses and governments. Nowadays any business sector is more or less competitive, which requires all it's participants to be dynamic and creative. Modernization and expansion is a vital part of modern business world. Governments, as owners of resources that allow businesses to expand and modernize, are always ready to sell those resources as it will eventually help businesses and certainly bring revenues.

The best way for government to sell available resources is to declare an auction. That's where auction theory comes into play. Modern auction theory is a very powerful tool for designing auctions of very profitable kind. Proper auction design will rise maximum amount of money for the government and provide companies with resources they need. However actions that maximize profits for the government have a direct influence also on the life of the citizens, as Dixit puts it: "...because of significant contributions the budget, auctions affect important macroeconomic magnitudes, such as interest rates".

So, auctions held by government, and to be more specific properly designed actions directly influence the life of modern country. In this essay I would like to make a kind of short review of auctions of spectrum rights for third generation mobile phones held in Europe in year 2000. The peculiarity of these auctions lies in the fact that revenues that were generated by European governments are different as a result of differently designed actions they held. This fact allows as to trace features of the auctions that were successful and resulted in relatively high revenues for the government.

There were 6 European countries to held spectrum right auctions in 2000. They were: United Kingdom, Austria, Germany, Italy, Netherlands and Switzerland. Let's start with United Kingdom as it was the first country to hold such kind of auctions.

Strategy that United Kingdom had chosen was selling 5 licenses during classical ascending auction. Auction resulted in huge revenues: 650 euros per capita. Firstly it should be said that auctions as any normal business activity should be competitive in order to be effective. UK spectrum auction was relatively competitive attracting 13 participants. There are several reasons why this action attracted so many participants. Firstly, UK was the first country in the world to hold spectrum rights auction. Participants were not completely aware of the usefulness of 3G cell phones, but were eager to get competitive advantage in the new generation mobile communication technology. Secondly, UK sold 5 licenses to the market with 4 major phone operators. This fact attracted new entrants, since at least one of the licenses can be potentially won by new entrants to the market. Both this facts generated highly competitive auction environment and limited possible collusions. Result of the auction was a huge success for UK government.

Auction Theory and Design

The next country to run spectrum rights auction in 2000 was Netherlands. This auction raised 170 euros per capita. Reason of such flop, comparing to the British result was lack of competition. When auction were run there were 5 major phone operators for 5 licenses to be sold. Few entrants decided to participate in the auction, since everybody was sure that 5 licenses will be distributed among market leaders. Another factor that made things even worse was the fact that that was an ascending auction. In this case with few participants there is a risk of collusion among market leaders. Netherlands would have generated much more money if they would some how encourage competition and change the action design in such a way that it would be possible for participants other than market leaders to place bids independently of each other to reduce collusion (sealed bid).

Italy generated 240 euros per capita and attracted 6 participants. Italy intentionally reduced amount of participants by imposing a requirements that participant of the auction must satisfy. Such situation combined with the fact that Italian auction was ascending could result in possible collusions among competitors. As a result wrong auction design resulted in low revenues.

Swiss auction was a real flop. They generated only 20 euros per capita. Here amount of participants was also artificially limited by allowing participants to join into the groups. And the price that government accepts was also reduced for some reason. Number of participants was sufficient to run profitable auction, but combination of officially permitted collusions and low reserve price resulted in absolutely insufficient revenues.

German and Austrian auctions were similar. Number of participants in both countries' auctions was low, which means that there were risks of collusion. Both countries sold licenses in blocks, allowing "number of winners be determined by bidders". Additionally Austrian government set a very low reserve price. Germany and Austria generated 615 and 100 euros per capita in revenue respectively. Germany designed auction in such a way that bids of two main market players were rationalized in a way that it resulted in high revenues.

Generally, the main difference in revenues generated from spectrum rights auctions can be explained by the difference in chosen auction design. Different auction design results in different amounts of money in revenues. Countries that tried to facilitate competitive bidding and limited the possibilities of collusion enjoyed high revenues.

Klemperer say that what really matters in auction design is "robustness against collusion and attractiveness to entry". Exactly the combination or lack of one of this factors resulted in the difference in the revenues generated by European countries. Any country that wants to increase revenues from auction must try to facilitate the competition among bidders by trying to make participation in auction as attractive as possible and eliminating any barriers for participation. There should be no cooperation between participants, as it will result in lower bids and as a consequence in low revenues. Countries should not choose auction design that facilitates collusion, as ascending auction in our case.

Auction Design and Revenue Generation: Lessons from European 3G Auctions

Of course there are several other reasons for difference in revenues, among them there is a fact that UK as a country that run the first spectrum rights auction in the world, might have enjoyed high revenues simply because participants were new to the licenses and had no idea of their true value. Overall economic situations in the counties as well as political might also result in differences in revenues. But the main reason for difference in profitability of the spectrum licenses auctions is difference in auction designs which were effective in some countries and not in the others.

In the year 2000, there were auctions of spectrum rights for third generation mobile telephones in several European countries. These auctions generated very different amount of revenue in different countries. How can this be explained?

In the year 2000, European auctions of 3G mobile telecommunication licenses raised over 100 billion euros in government revenues. The countries that participated were United Kingdom, Netherlands, Italy, Switzerland, Germany and Austria. There was a big differential between revenues raised in each country with United Kingdom leading at 650 euros per capita and Switzerland coming in last at 20 euros per capita. The reasons for this big discrepancy in revenues is likely due to poor auction designs and the sequence in which the auctions took place.

When it comes to auction design, the two crucial components are attracting entry and preventing collusion. Ascending auctions encourage bidders to act collusively and deter weaker potential bidders as they know that the stronger bidder will always out bid him. On the other hand, (first-price) sealed-bid auctions act in the opposite direction from ascending auctions. It does not give bidders a chance to collude and encourages weaker bidders to participate. However, the disadvantage of using a sealed-bid auction is that it is more likely to lead to inefficient results than an ascending auction. The reason for this is that sometimes bidders with a lower value may beat opponents with a higher value. Hence, there is no perfect auction design and they must be customized to suit different environments and targets.

United Kingdom was the first to hold the auctions and they are a good example of how a well-planned auction design and good marketing strategies can lead to a favourable outcome. As there were five licenses and 4 incumbents, they had an ascending auction. To prevent collusion, each license could not be shared and each bidder was allowed no more than one license. Also, the fact that at least one license was available to new entrants lead to fierce competition from nine new entrants. To top it all off, UK had a solid marketing strategy which was planned over three years (1997 - 2000). All this helped contribute to UK raising 39 billion euros and being the most successful out of all the countries that took part in the 3G auctions.

Conclusion

Netherlands, Italy and Switzerland made the mistake of following UK and carrying out an ascending auction when a sealed-bid auction would have served them better. This resulted in revenues less than that achieved by UK.

In the case of Netherlands, they had five licenses and five incumbents. This deterred new entrants as well as facilitated collusion. For example, Deutsche Telekom colluded with local incumbents to bid for a 3G license. A sealed-bid would have worked better as this would have discouraged joint bidding, raise higher revenues as well as give new entrants a glimmer of hope.

Italy had their auction next but failed to learn from Netherlands and UK. Their auction design was not robust and failed to adapt to the environment in Italy. They adopted the UK design but had the additional rule that if bidders did not exceed licenses, the number of licenses would be reduced. They did not realize that having one more bidder than license does not assure that the outcome will be competitive. Also, Italy had failed to anticipate that firms would react differently to those in Netherlands and UK as they now had more information. Hence, weaker bidders were discouraged by previous auctions and did not bother to participate and since the participation rate was low, it made it easier for the strong bidders to collude. A bad auction design that was not tailored to the Italian environment and a low reserve price resulted in Italy only earning less than 25 billion euros.

Switzerland was the most unsuccessful amongst all the countries that held the auctions. It raised only 20 euros per capita in its ascending auction and this can be attributed to an unfeasible auction design, badly formulated rules and an absurdly low reserve price. Since the beginning, weaker bidders were deterred by the auction form. They felt that they did not stand a chance against the strong bidders and hence did not bother participating. This resulted in little competition. Furthermore, The Swiss government committed auction suicide when they permitted last-minute joint-bidding! This resulted in nine bidders colluding to become just four. The last mistake that the Swiss government made was to set a reserve price that was way too low. Since there were four licenses and four bidders, bidders ended up paying only the reserve price.

Germany and Austria chose a more complicated auction design.

Germany's auction design was an ascending auction of twelve blocks of spectrum from which bidders could create four three-block licenses or six two-block licenses. Germany's auction design was very susceptible to collusion and deterring new entrants but they were lucky and managed to earn high revenues.

Austria, on the other hand, adopted Germany's auction design but was not so lucky and only earned 100 euros per capita. The reason for this was that there were 6 bidders competing for 12 blocks of spectrum and a very low reserve price (one-eight of the reserve price in Germany). So instead of trying to get three blocks of spectrum, the bidders divided the 12 blocks of spectrum equally and paid the reserve price. This reason lead to Austria earning less per capita revenue than UK and Germany.

The other factor that affected the amount of revenue earned by each country was the sequence in which the auctions took place. Looking at the results of the 3G auctions held in 2000, it can be seen that the most successful auctions were the first of their type (United Kingdom and Germany). The reason for this is that between auctions, bidders learnt from previous auctions, came up with new strategies and learnt more about their rivals. However, the auction designs remained almost the same and were unable to keep up with the new ideas the bidders had come up with. This resulted in the later auctions not being as successful as the first.

In conclusion, the reason for the different revenues earned amongst the countries that took part in the 3G auctions is due to the auction designs and the sequence in which they took place. Revenues depend on how well the auction design is able to attract entry and prevent collusion. Also, it has to be able to adapt to new environments. For example, a good auction design takes into account the information bidders have and the knowledge they have gained from previous auctions. A sensible reserve price is of high importance as well and should not be overlooked like in the case of Switzerland and Germany. Lastly, auction design is not "one size fits all" and the failure of the government to design an auction that suited the country's environment lead to different revenues being earned.

Overview of 3G Spectrum Rights Auctions in Europe

Over the decades, global political framework has undergone immense dynamics and changes, much of which can be attributed to the changes in the overall behavioural trends of the population across the countries in the world and the complexities arising in governing the social, economic, political as well as other aspects of the countries specifically and the world as a whole (Mosco 2014). With events of international significance like that of Globalization, Liberalizations and others, the global political scenario has become much more integrated and inclusive, which in turn implies that the political trends of one country now depend both on the internal dynamics as well as exogenous factors from other countries (Gilpin 2016).

As discussed above, with the economies becoming more integrated and inclusive, with more dynamics in every aspect, it becomes immensely essential for the countries and regions to form an effective and efficient governing system as the prosperity, growth and development of every aspects of a country heavily depends on how efficiently and appropriately the government of the country performs (Hayek 2012). Politics, in this aspect plays a crucial role as it is the process of building up the governance of a country or a region. There are different ways in the political framework, in which the government of the countries are constructed and are operated. One of the most significant and widely used mechanisms of forming a government is that of the method of election. The method of “Election” is the political process, in which the people who aspire to hold public official posts are evaluated and voted for by the eligible voters of a region or a country (Bawn et al. 2012). The elected people are expected to serve as the representatives of the population, thereby fulfilling the needs of the same. With a fair share of the countries in the contemporary period being democracies, this process is extremely popular and is most widely use to form governments.

The candidates and political parties who stand to compete in these types of elections take various strategies and modes to reach out to the voters and to gain their trust. One of the most commonly practiced method for this purpose is the process of political campaigning of the groups in front of the voters, with the use of various mediums (Erikson and Wlezien 2012). Keeping this into account the concerned essay discusses and interprets the National and Local Elections of 2007, held in the Philippines and especially in the region of Cebu, thereby discussing the role played by campaigning of the different candidates in influencing the results of elections in Cebu, especially.

Auction Theory and Design

In political framework, the notion of “Campaigning”, refers to the different promotional steps which are adopted by various political groups or candidates, during the times of elections especially, to highlight their credibility and better prospects over their competitors in front of the eyes of the eligible voters of a country or a region, in order to gain their trusts, thereby ensuring victories in the elections (Vergeer 2013). In the contemporary periods, with significant presence of different types of mass media, including print, radio, television and even internet as a social media, this is one of the most eminent and influencing steps taken by the political parties across the globe, especially in the recent periods (Kreiss 2016).

There exist different theoretical assertions regarding the ways in which political campaigning helps in influencing the results of the elections. The primary ones are discussed as follows:

Dissemination of information and voter’s knowledge- In the democratic countries, especially as well as in the global political scenario, the decisions taken by the voters are of immense importance as much of the nature and types of government formed and the purposes they serve tend to depend on the candidates whom the voters choose with the help of their voting rights (Hendricks and Kaid 2014). Thus, for effective decisions on part of the voters, it is of utmost importance for sufficient information about each of the candidates and their credibility as well as about the overall political structure of the regions or countries to be present with the voters, such that they can tally and compare all the options and take right decisions. Political campaigning plays crucial roles in this aspect in disseminating information about the activities and credibility of different political parties in front of the voters thereby helping in the learning process of the voters (Lilleker and Jackson 2013).

Participation of the voters- The purpose of an election remains unsuccessful if a significant share of the voters does not feel the urge to vote and participate in forming their government. In this aspect the political campaigning methods paly a crucial role, especially in making the voters of a country or a region feel an eminent part of the whole election process and in the process of building up the government (Barton, Castillo and Petrie 2014). The voters, getting information from the campaigning agendas feel empowered and responsible as residents of a place, which in turn leads to increased participation as well as enthusiasm among them thereby increasing the share of voters in election processes.

Auction Design and Revenue Generation: Lessons from European 3G Auctions

Enlightenment- The campaigning processes, in general, makes the voters of a country, enlightened about their rights and the facilities which they are entitled to as citizens of a country. it also helps them to understand the wrongdoings in a country and the need to rectify the same through the process of building up a sensible and efficient government by exercising their voting rights.

Political Agenda- The process of campaigning helps the political parties to put forward their agenda of activities as well as promises in front of the voting population of a region and also to compare the same with that of the other contenders. This in turn helps the parties and candidates to reframe and update their agendas and promises to stay ahead as well the voting population of the country to know about the promises of the contenders and chose accordingly (Thurber 2018).

However, apart from these and many other positive implications of political campaigning process, there remains several arguments against this process too, the primary one being that of misguiding the voters by making false promises and providing false hopes, which may have very little chance of realization. These are often done by the political parties to gain majority of the voters’ confidence and trust, thereby ensuring victories, post which the parties indulge in own welfare maximizing only (Johnson-Cartee and Copeland 2013). However, in spite of such credible criticisms, political campaigning is still one of the most popular methods taken by the parties in the political framework of the countries and regions across the world, especially in the times of election processes.

Located in South East Asia, Philippines or the official Republic of Philippines is known to be one of the oldest republics in this region with a population of 100 million and with a democratic political framework, with the presidential system along with a bicameral Congress in the country. The Congress, in turn, consists of an Upper House (the Senate) and a Lower House (the House of Representatives) (Querubin 2012).

The National and Regional Election of 14^th May, 2007

Elections are held in the concerned country at regular intervals with significant exercise of the voting rights of its residents as Philippines is primarily a democratic country. One such election of considerable importance was the National and Local Election which took place on May 14^th, 2007 (Abinales and Amoroso 2017). This election was of huge implications due to its magnitude, the sheer number of seats at stake and also due to the tremendous pre and after maths of the election on the political trends as well as on the overall social stability of the country and especially in the region of Cebu specifically.

Conclusion

In this particular election, nearly half of all the seats of the Senate and all the seats of the House of Representatives, in the Congress, were open for competing candidates along with many other national and regional public official posts. The election in Philippines, apart from its magnitude and significance, was also marked by extreme social instability and violence. The pre and post math of the election took nearly 128 lives along with numerous non-fatal wounded population (The PCIJ Blog 2018).

The result of the 2007 election was also unexpected and interesting with the Administration’s Team Unity getting defeated in broad margins by that of the Genuine Opposition side, which won seven out of ten available seats, which was quite a commendable victory on their part. Antonio Trillanes (IV) came to public office in Senate and the Arroyo coalition got even more empowered in the House of Representatives in the country, with a striking 88% share of victory in the congressional districts of Philippines (Pcij.org 2018). The results were also very prominent in the Cebu region of the country, where the primary winners were Tomas Osmena, the governor of the city and Rema, Garcia and Gregorio Sanchez.

The concerned essay emphasizes on the election patterns of Cebu specifically due to the fact that the election patterns in the concerned region were significantly influenced specifically by the political campaigning methods which were extensively taken in the region, which in turn played a crucial role in influencing the behaviour and voting patterns of the population of the country and is thus one of the primary real life example of the role and significance of political campaigning in the determination of the future success or failure of a political party or candidate and also in the process of building up people’s government in a country (Chanrobles.com 2018).

Role of campaigning in Cebu: May 2007 Election Scenario

As discussed above, the election of 2007 had immense importance in the aspects of structural changes in the national as well as state government framework because many crucial national and local seats were at stake. In Cebu, the local election was conducted for the posts of mayor and vice-mayor of the city. For the post of mayor, the contenders were Tomas Osmena and Mary Ann delos Santos and on the other hand, for the post of vice-mayor the contenders were Raymond Garcia and Michael Rama (Timberman 2016). All the candidates being extremely strong and popular, competition was extremely tough and none of the candidates left any stone unturned to gaining the confidence of the voters.

However, of the different strategies taken by all the candidates, there was one common strategy which was used by all of them, the strategy being that of widespread campaigning with the use of the different media resources. However, the nature of political campaigning, the types of media used, the sentiments and visions targeted and the underlying notions and perceptions behind the same differed for the candidates. These differences and the overall implications of the different campaigning mechanisms taken by the different candidates in the Cebu election are discussed as follows:

Campaigning strategies of Santos and Garcia

Santos resorted to an emotional and sentimental aspect of campaigning, especially with the help excessive reliance on the print media, in terms of newspapers and flyers. The main catch phrase used in the campaigning for this concerned candidate was “We Can Make a Difference” (Tomsa and Ufen 2013). The main intension behind this promotional line for Santos was to attract the residents of the city, especially the middle class and poor unsatisfied ones and to gain the voters confidence banking upon their emotional quotient, by giving them this view that whatever grievances they have on the existing government will be passionately handled by the candidate. The notion behind such a campaign was to emotionally attract the voters.

Campaigning strategies of Osmena

While Santos played on the emotional front, Osmena heavily relied on providing factual points to the voters. In the BO-PK advertisement campaign, the primary aspects which were highlighted were the credibility of each of the candidates and the promises they want to make to the residents for an efficient government. The areas which they promised to explore and the issues they assured to address were put forward clearly along with their credibility under the catch phrase of “Can you get a better deal?”, which in turn made the voters perceive to some extent that they cannot (Tomsa and Ufen 2013).

The campaigning of Osmena, unlike Santos, heavily relied on television and non-print media and also started just a couple of days before election in order to make the voters remember him. While Santos and Garcia heavily relied on newspaper media (with 12 and 22 advertisements respectively, in Sun-Star Newspaper in the span of one month), Osmena (1) and Rema (0), did not do the same (Newsinfo.inquirer.net 2018). 

The factual mode of campaigning of Osmena and Rema proved to be more effective than the emotional and warm campaigning of Santos or Garcia as was seen from the victory of Osmena in the local election of Cebu in 2007.

Conclusion

From the above discussion, it is observed that politics play a crucial part in forming the governing structure of a country and in determining the overall performance of the different aspects of the countries in general. In this context, the political campaigning plays crucial roles in influencing the voting decisions of the population thereby having implications on the structure of the government. The implications and importance of political campaigning can be seen from the role played by the same in the regional election of Cebu, Philippines, which was held in May 14^th, 2007 and where the difference in the magnitude, technique and forms of political campaigning of the different political contenders were seen to play considerable roles in determining the result of the concerned election.

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