The challenge of designing auctions to preserve competition

Posted on March 25, 2011  /  2 Comments

Auction design is hot. The Economist reports on 4G auction design in the UK:

The government will want to squeeze as much revenue as it can from the sell-off, but it must also preserve competition in a consolidating industry. The recent merger of Orange and T-Mobile has left Britain with four mobile-phone operators: Everything Everywhere (the imperious name for the newly merged company), Vodafone, O2 and Three. That is a healthy number compared with some countries, such as America, where AT&T’s proposed acquisition of T-Mobile USA would create what some regard as, in effect, a duopoly. But Three warns that it would struggle in an unrestrained bidding war with its larger rivals for the new spectrum. Without 4G services, it might be forced out of the market, cutting the number of operators to three.

Ed Richards, head of Ofcom, the telecommunications regulator, appears to share this concern. The draft auction rules surprised many in the industry by explicitly aiming to preserve four providers. Ofcom plans to do this by capping how much spectrum any one company can buy, and by forcing the auction to be repeated if four separate bids are not successful.


  1. Mergers and Acquisitions if vetted properly by a competition authority for the effect on competition should not be scoffed at. M&As are the lifeblood of healthy competition. The regulators in their ex-ante role of fostering competition also decide on the minimum number of players. Artificial scarcity of spectrum can act as a spoiler and the adverse outcome will be that the operators do not get the minimum efficient scale of spectrum. But that does not mean give out spectrum on the basis of a “beauty contest”. Good auction designs can take care of competition and transparency.
    However, analysts who talk about competition in terms of the survival of the small players correlate the number of players to competition. Competition is what emerges from the market and M&As are a part of the package. Who best can decide whether after a minimum has been prescribed and after M&As have carefully looked at the impact on competition what should be the optimal number of operators? No one else but the market. So to cry for the small operators, is just a legacy of the socialist thinking!
    After all these are oligopolistic industries with huge investment requirements, so is steel, and cannot be operated from the backyards. Going back to Schumpeter, these industry structures are hot beds of innovation and have from our recent experiences served the consumer well!
    The cries to protect the small operators form the “ills” of auction may be well meaning for these operators but not for the million consumers! Some gainers and some losers is the name of the game, as far as the gainers outstrip the losers we are doing fine!

  2. So while, auctions if designed properly can achieve competition as well as transparency for a given amount of available spectrum, and the above comment should also be seen as a reply to the earlier blog