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31 - Winning Play in Spectrum Auctions
- from Part V - The Bidders’ Perspective
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- By Jeremy I. Bulow, Graduate School of Business, Stanford University, Jonathan Levin, Graduate School of Business, Stanford University, Paul R. Milgrom, Department of Economics, Stanford University
- Edited by Martin Bichler, Technische Universität München, Jacob K. Goeree, University of New South Wales, Sydney
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- Book:
- Handbook of Spectrum Auction Design
- Published online:
- 26 October 2017
- Print publication:
- 26 October 2017, pp 689-712
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Summary
Introduction
Since being pioneered by the U.S. in 1994, simultaneous ascending auctions have become a common mechanism to allocate spectrum rights. Spectrum auctions can involve billions of dollars and companies bidding in these auctions regularly create specialized bidding teams and hire experts in auction theory to develop bidding strategies. Nevertheless, the results can be surprising. In the FCC's auction of Advanced Wireless Service spectrum, price arbitrage failed so dramatically that one new entrant was able to purchase essentially nationwide coverage for about a third (more than a billion dollars) less than what incumbent carriers paid for equivalent spectrum in the same auction. At the same time, the other prospective nationwide entrant exited the auction early and filed a letter with the FCC claiming that the auction rules disadvantaged new entrants!
Results of this sort raise questions for economists. Does the apparent failure of the Law of One Price indicate a fundamental flaw in auction design? If not, why must such auctions be complicated? What are the issues that create strategic complexity for bidders? And to what extent can the tools of economic theory provide insights that facilitate effective bidding in highly complex environments?
We start by explaining some of the reasons why large spectrum auctions are necessarily complicated, and why the Law of One Price can fail so dramatically in a spectrum auction.We emphasize two difficulties facing bidders: exposure problems, which are essentially the problems of bidders wishing to acquire complementary licenses, and budget constraints, which we argue are ubiquitous.We explain why these difficulties make bidding in simultaneous ascending auctions complicated, and also why they would complicate bidding in other auction designs.
Exposure problems create fundamental difficulties for a new entrant seeking to compete head-to-head with incumbent nationwide wireless carriers in the US. Such an entrant needs to acquire adequate bandwidth in every major metropolitan area, but because licenses covering cities or regions are sold individually, the entrant could commit to spending billions of dollars winning spectrum licenses before discovering that the total price for the bundle of licenses it seeks makes the whole entry unaffordable or unprofitable. It could then be left to dispose of extensive holdings at fire-sale prices.
1 - Putting Auction Theory to Work: The Simultaneous Ascending Auction
- from Part I - The Simultaneous Multiple-Round Auction
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- By Paul R. Milgrom, Department of Economics, Stanford University
- Edited by Martin Bichler, Technische Universität München, Jacob K. Goeree, University of New South Wales, Sydney
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- Book:
- Handbook of Spectrum Auction Design
- Published online:
- 26 October 2017
- Print publication:
- 26 October 2017, pp 3-25
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Summary
Introduction
The “simultaneous ascending auction” was first introduced in 1994 to sell licenses to use bands of radio spectrum in the United States. Much of the attention devoted to the auction came from its role in reducing federal regulation of the radio spectrum and allowing market values, rather than administrative fiat, to determine who would use the spectrum resource. Many observers were also fascinated by the then-novel use of weblike interfaces for bidders. The large amounts of money involved were yet another source of interest. The very first use of the auction rules was a $617 million sale of 10 paging licenses in July 1994. In the broadband personal communications services (PCS) auction, which began in December 1994, 99 licenses were sold for a total price of approximately $7 billion. Once the auctions had been conducted, it became much harder to ignore the tremendous value of the large amounts of spectrum allocated to uses such as high-definition television, for which Congress had demanded no compensation at all. Moreover, the perceived successes with the new rules inspired imitators to conduct similar spectrum auctions in various countries around the world and to recommend similar auctions for other applications.
Among academic economists, attention was also piqued because the auction design made detailed use of the ideas of economic theory and the recommendations of economic theorists. Indeed, the U.S. communications regulator adopted nearly all its important rules from two detailed proposals for a simultaneous ascending auction: one by Preston McAfee and the other by Robert Wilson and me. Economic analysis dictated nearly all the rule choices in the first few auctions. Various reviews suggest that the new auction design realized at least some of the theoretical advantages that had been claimed for it.
Several parts of economic theory proved helpful in designing the rules for the simultaneous ascending auction and in thinking about how the design might be improved and adapted for new applications. After briefly reviewing the major rules of the auction in Section II, I turn in Section III to an analysis based on tatonnement theory, which regards the auction as a mechanism for discovering an efficient allocation and its supporting prices. The analysis reveals a fundamental difference between situations in which the licenses are mutual substitutes and others in which the same licenses are sometimes substitutes and sometimes complements.
6 - The Clock-Proxy Auction: A Practical Combinatorial Auction Design
- from Part II - The Combinatorial Clock Auction Designs
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- By Lawrence M. Ausubel, Department of Economics, University of Maryland, Peter Cramton, Department of Economics, University of Maryland, Paul R. Milgrom, Department of Economics, Stanford University
- Edited by Martin Bichler, Technische Universität München, Jacob K. Goeree, University of New South Wales, Sydney
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- Handbook of Spectrum Auction Design
- Published online:
- 26 October 2017
- Print publication:
- 26 October 2017, pp 120-140
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Summary
Introduction
In this chapter we propose a method for auctioning many related items. A typical application is a spectrum sale in which different bidders combine licenses in different ways. Some pairs of licenses may be substitutes and others may be complements. Indeed, a given pair of licenses may be substitutes for one bidder but complements for another, and may change between substitutes and complements for a single bidder as the prices of the other licenses vary. Our proposed method combines two auction formats—the clock auction and the proxy auction—to produce a hybrid with the benefits of both.
The clock auction is an iterative auction procedure in which the auctioneer announces prices, one for each of the items being sold. The bidders then indicate the quantities of each item desired at the current prices. Prices for items with excess demand then increase, and the bidders again express quantities at the new prices. This process is repeated until there are no items with excess demand.
The ascending proxy auction is a particular package bidding procedure with desirable properties (see Ausubel and Milgrom 2002, 2006). The bidders report values to their respective proxy agents. The proxy agents iteratively submit package bids on behalf of the bidders, selecting the best profit opportunity for a bidder given the bidder's inputted values. The auctioneer then selects the provisionally winning bids that maximize revenues. This process continues until the proxy agents have no new bids to submit.
The clock-proxy auction is a hybrid auction format that begins with a clock phase and ends with a final proxy round. First, bidders directly submit bids in a clock auction, until there is no excess demand for any item. Then bidders have a single opportunity to input proxy values. The proxy round concludes the auction. All bids are kept live throughout the auction. There are no bid withdrawals. The bids of a particular bidder are mutually exclusive. There is an activity rule throughout the clock phase and between the clock phase and the proxy round.
21 - Assignment Messages and Exchanges
- from Part III - Alternative Auction Designs
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- By Paul R. Milgrom, Department of Economics, Stanford University
- Edited by Martin Bichler, Technische Universität München, Jacob K. Goeree, University of New South Wales, Sydney
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- Book:
- Handbook of Spectrum Auction Design
- Published online:
- 26 October 2017
- Print publication:
- 26 October 2017, pp 443-461
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In abstract mechanism theory, the designer is often presumed able to create a direct mechanism in which each participant reports its “type,” revealing the participant's preferences along with anything else the participant may know. In practice, these details can be too numerous to report. For example, in Federal Communciations Commission (FCC) Auction No. 66 with 1,132 licenses for sale, a type includes a vector of values for every subset of licenses. Reporting that vector would have entailed reporting 21132 numbers.
One approach to mitigating the length-of-report problem is to simplify reporting by limiting the message space. The National Resident Matching Program uses this approach. It limits hospitals’ reports to a number of positions and a rank order list of candidates. If a hospital has 10 openings and interviews 50 candidates, it reports the number 10 and a list of 50—a manageably short message. In contrast, because the number of classes of 10 or fewer doctors from among 50 is about 1.3 × 1010, a general type report, including a rank order list of all those classes, would be impracticably long.
This paper introduces and analyzes a new message space—the space of assignment messages—designed for use in auctions, exchanges, and other applications where goods are substitutes. Assignment messages describe preferences indirectly as the value of a linear program for which the set of constraints is describable as a structured collection of trees or hierarchies. We show that if the constraints have this form, then the goods are substitutes, regardless of the various parameters. Conversely, if the constraints describing substitution among different goods do not respect the tree structure, then there exist parameters such that goods are not a substitutes. In that sense, the constraint structure employed by assignment messages is the most general one consistent with substitutable preferences in linear programming.
11 - Core-Selecting Package Auctions
- from Part II - The Combinatorial Clock Auction Designs
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- By Robert Day, School of Business, University of Connecticut, Paul R. Milgrom, Department of Economics, Stanford University
- Edited by Martin Bichler, Technische Universität München, Jacob K. Goeree, University of New South Wales, Sydney
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- Book:
- Handbook of Spectrum Auction Design
- Published online:
- 26 October 2017
- Print publication:
- 26 October 2017, pp 226-240
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Introduction
Recent years have seen several new and important applications of matching procedures in practical applications, including school assignments in New York and Boston and new designs for life-saving organ exchanges. The mechanisms that have been adopted, and sometimes even the runner-up mechanisms, are stable matching mechanisms. Recall that stable matches are matches with the property that no individual can do better by staying unmatched and no pair can both do better by matching to one another. Since pairs are the only significant coalitions in this theory, stable matches are a kind of core allocation. Stable matching mechanisms are direct mechanisms that select a stable match with respect to the reported preferences; the definition does not require that the mechanism be incentive-compatible.
Evidence suggesting that stable matching mechanisms remain in use long after unstable mechanisms have been abandoned is found both in empirical studies (Roth and Xing 1994) and in laboratory experiments (Kagel and Roth 2000). If stable mechanisms actually lead to stable matches, then these mechanisms have the important practical advantage that no couple that would prefer to renege after the mechanism is run in favor of some alternative pairing, because no such agreement can be better for both members of the couple than the outcome of a stable matching mechanism. Even for a stable mechanism, with enough uncertainty, there might be pairs that could increase their expected payoffs by matching in advance, but the resulting unstable match would be vulnerable to defections by parties who might find a better alternative.
A similar analysis applies to core-selecting auction mechanisms. An individually rational outcome is in the core of an auction game if and only if there is no group of bidders who would strictly prefer an alternative deal that is also strictly better for seller. Consequently, an auction mechanism that delivers core allocations has the advantages that there is no individual or group that would want to renege after the auction is run in favor of some allocation that is feasible for it and any non-core agreement made before the auction is vulnerable to defections, as the seller attracts better offers afterwards.
37 - Designing the US Incentive Auction
- from Part VI - Secondary Markets and Exchanges
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- By Paul R. Milgrom, Department of Economics, Stanford University, Ilya R. Segal, Department of Economics, Stanford University
- Edited by Martin Bichler, Technische Universität München, Jacob K. Goeree, University of New South Wales, Sydney
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- Book:
- Handbook of Spectrum Auction Design
- Published online:
- 26 October 2017
- Print publication:
- 26 October 2017, pp 803-812
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Summary
The US government recently completed a new kind of double auction, which aquired television broadcast rights from current TV broadcasters and sold mobile broadband licenses. Known as the “incentive auction” because it was intended to create an incentive for TV broadcasters to relinquish their licenses, this auction involved tens of billions of dollars of payments and determined an allocation that satisfies millions of interference constraints. In this paper, we describe why the problem is so complex, outline the auction's final design adopted by the Federal Communication Commission, and describe how this design overcame the novel challenges that the FCC faced.
Background and Challenges
The incentive auction was mandated by an act of Congress in February 2012. In the years since the introduction of the iPhone, iPad, and similar devices, there has been explosive growth in the demand for broadband services and the spectrum it uses. The US government responded with its National Broadband Plan, which aims tomakemore spectrum available for broadband services partly by clearing some bands currently in other uses. Some spectrum used for UHF television broadcasts was very well suited to broadband. Since 90% of US households had access to cable or satellite television, over-the-air broadcasting appeared to be less important than in an earlier era. Also, the switch to digital TV signals made it possible to transmit several standard-definition signals using a single TV channel.
The Roles of Government and Auction
Economists naturally ask: Why not just rely on private transactions to shift spectrum resources to their most valuable uses? Why is value added by a government intervention?
The answer is that spectrum reallocation has the characteristics of a collective action problem. In order to use spectrum most effectively, the frequencies used for TV broadcasting need to be nearly the same across the whole country and the wireless broadband uses must be separated from TV frequencies and coordinated to avoid unacceptable interference between uplink and downlink uses.
1 - Auction theory
- Edited by Truman Fassett Bewley
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- Book:
- Advances in Economic Theory
- Published online:
- 05 January 2013
- Print publication:
- 26 June 1987, pp 1-32
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Introduction
Auctions are one of the oldest surviving classes of economic institutions. The first historical record of an auction is usually attributed to Herodotus, who reported a custom in Babylonia in which men bid for women to wed. Other observers have reported auctions throughout the ancient world - in Babylonia, Greece, the Roman Empire, China, and Japan.
As impressive as the historical longevity of auctions is the remarkable range of situations in which they are currently used. There are auctions for livestock, a commodity for which many close substitutes are available. There are also auctions for rare and unusual items like large diamonds, works of art, and other collectibles. Durables (e.g., used machinery), perishables (e.g., fresh fish), financial assets (e.g., U.S. Treasury bills), and supply and construction contracts are all commonly bought or sold at auction. The auction sales of unique items have suggested to some that auctions are a good vehicle for monopolists. But it is not only those in a strong market position who use auctions. There are also auction sales of the land, equipment, and supplies of bankrupt firms and farms. These show that auctions are used by sellers who are desperate for cash and willing to sell even at prices far below replacement cost.
Radiative Acceleration of Astrophysical Jets: Line-Locking in SS 433
- Paul R. Shapiro, Mordecai Milgrom, Martin J. Rees
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- Journal:
- Symposium - International Astronomical Union / Volume 97 / 1982
- Published online by Cambridge University Press:
- 14 August 2015, pp. 209-210
- Print publication:
- 1982
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Observations of SS433 are consistent with the view that the Doppler-shifted line emission originates in a pair of oppositely-directed, precessing jets in which a gas outflow is maintained at the remarkably time- and space-invariant speed of 0.26c. A radiative acceleration mechanism is described for the jets and a detailed, numerical, relativistic flow calculation presented which explain this terminal velocity as the result of “line-locking”. The “line-locking” mechanism suggested here for SS433 may be important as well in extra-galactic radio sources in which the radio luminosity is similarly weak compared with the kinetic energy and optical luminosities.