The FCC is planning to auction wireless spectrum rights, with the goal of maximizing the revenue that it receives from the auction. These rights will almost certainly be used to support wireless communications devices, such as cell phones, pagers, etc. The FCC hires your team to advise it on the proper structure for the auction. You have to address the following questions:
a. Assume that all the bidders plan to operate wireless services (rather than, for example, to resell their wireless rights). Do you think this is more likely to be a common value auction (the rights will ultimately have the same value whoever wins) or a private value auction (the value will be very different for different bidders, based on characteristics of the bidders)? Why?
b. Would you recommend that the FCC use a English auction or a sealed bid auction? A first-price auction or a second-price auction? Why? How does your answer to part (a) affect your answer to part (b)?
a. In this scenario, it is more likely to be a private value auction. The value of the wireless spectrum rights will vary among different bidders based on their individual characteristics and strategies. Each bidder will have its own unique business model, market position, and technological capabilities, which will influence the value they place on the spectrum rights. As a result, the value of the rights will be different for each bidder.
b. Given that it is a private value auction, I would recommend that the FCC use a sealed bid auction rather than an English auction. In a sealed bid auction, each bidder submits their bid privately without knowledge of the bids submitted by other participants. This format ensures that each bidder independently assesses the value they are willing to pay for the spectrum rights, without being influenced by the bids of other participants.
As for the pricing mechanism, I would recommend the FCC to use a second-price auction. In a second-price auction, the highest bidder wins the auction but pays the price of the second-highest bid. This mechanism encourages bidders to bid their true maximum value, as they will only pay the amount necessary to outbid the second-highest bidder. This increases the likelihood of achieving the maximum revenue for the FCC.
The answer to part (a) does not have a significant impact on the choice between a sealed bid auction and an English auction. Regardless of whether it is a private value or common value auction, a sealed bid auction provides a fair and unbiased platform for bidders to submit their bids without knowledge of other participants' bids. However, the answer to part (a) does influence the choice between a first-price and a second-price auction, as discussed above.
a. In this scenario, it is more likely that the auction will be a private value auction rather than a common value auction. The reason is that the value of wireless spectrum rights can vary significantly based on the specific characteristics and strategic objectives of the bidders. Different bidders may have different business models, subscriber bases, technological capabilities, or geographic coverage goals, which can lead to different valuations for the spectrum rights. For example, a national wireless carrier with a large customer base might be willing to pay more for the rights than a regional carrier with fewer customers.
b. Based on the assumption that this is a private value auction, my recommendation for the FCC would be to use a sealed bid second-price auction.
A sealed bid auction is preferable because it allows bidders to submit their bids confidentially, reducing the potential for collusion or strategic behavior. It ensures that each bidder makes an independent valuation without being influenced by the actions of others.
A second-price auction, also known as a Vickrey auction, is recommended because it promotes bidding truthfully. In a second-price auction, the highest bidder wins the spectrum rights but pays the price equal to the second-highest bid. This encourages bidders to bid their true valuations, knowing that they won't have to pay more than necessary to secure the rights. It also minimizes the potential for winners to overpay, as the price they pay is determined by competition rather than their own bid.
The answer to part (a) affects the answer to part (b) because if the auction were a common value auction, an English auction might be more appropriate. In a common value auction, where bidders have similar valuations, an English auction (also known as an open ascending bid auction) encourages active participation and price discovery. However, in a private value auction, where valuations differ significantly, a sealed bid auction is more suitable, and a second-price auction helps ensure efficient outcomes.