Introduction

The 1994 sale of radio spectrum for “personal communication services” (PCS) marked a sharp change in policy by the US Federal Communications Commission (FCC). Before turning to auctions the FCC had allocated valuable spectrum on the basis of comparative hearings (also known as “beauty contests”) and lotteries. Nobel laureate Ronald Coase long advocated that market-based mechanisms would improve the allocation of scarce spectrum resources, but his early insights were ignored for decades [1]. The PCS auction raised over six hundred million dollars for the US treasury and it was widely considered a success. Several authors discuss the advantages and disadvantages of auctions and beauty contests for allocating scarce spectrum [2, 3, 4]. For example, some argue that financially strong bidders might have advantages over weaker bidders in an auction, while others argue that with efficient capital markets such differences should be less of a concern. Nowadays, spectrum is predominantly assigned by auction, both in the US and elsewhere [5, 6], and in this paper we focus on questions of auction design.

The simultaneous multi-round auction (SMRA), which was designed for the US FCC in the early 90's has been the standard auction format for selling spectrum world wide for many years. It auctions multiple licenses for sale in parallel and uses simple activity rules which forces bidders to be active from the start. Despite the simplicity of its rules there can be considerable strategic complexity in the SMRA when there are synergies between licenses that cover adjacent geographic regions or between licenses in different frequency bands. Bidders who compete aggressively for a certain combination of licenses risk being exposed when they end up winning an inferior subset at high prices. When bidders rationally anticipate this exposure problem, competition will be suppressed with adverse consequences for the auction's performance. The exposure problem has led auction designers to consider combinatorial auctions, which enable bidders to express their preferences for an entire set of licenses directly. In fact, the design of spectrum auctions is seen as a pivotal problem im multi-object auction design and successful solutions are a likely role-model for other public or private sector auctions such as transportation or industrial procurement.

Since 2008, the combinatorial clock auction (CCA) has been used by regulators in various countries such as the Austria, Australia, Canada, Denmark, Ireland, the Netherlands, and Switzerland to sell spectrum.