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)?
tough question.
Here is a link that summarizes the myriad of types of auctions.
http://en.wikipedia.org/wiki/Auction
For a) my knee jerk reaction was a common value auction (but I could be pursuaded otherwise).
For b) definately not an English auction. The FCC should assume all bidders are well prepared. As I think the auction is common value, all bidders are prepared, and that spectrum is highly desireable, I think I would go with a first price sealed bid auction. But again, I could be pursuaded otherwise.
Do some research then take a shot
a. To determine whether the wireless spectrum rights auction is more likely to be a common value auction or a private value auction, we need to consider the characteristics of the wireless services market and the bidders involved.
In the case where all bidders plan to operate wireless services, it is more likely that the auction will be a private value auction. This is because the value of the wireless spectrum rights will vary among bidders based on their unique characteristics, such as their existing infrastructure, customer base, and business strategies. Each bidder will have different expectations and estimations of the potential revenue and profitability they can generate from the acquired spectrum rights.
b. Considering the auction format, the FCC has two main options: an English auction or a sealed bid auction. Additionally, they can choose between a first-price auction or a second-price auction.
Based on the goal of maximizing revenue, the recommended auction format would be a sealed bid second-price auction. In this format, bidders submit their bids privately without knowing the bids of other participants. The highest bidder wins the spectrum rights, but they only pay the amount of the second-highest bid. This approach encourages bidders to reveal their true valuation of the spectrum rights without fear of overpaying.
The choice of a second-price auction is beneficial because it induces bidders to bid their true maximum value without having to worry about paying more than necessary. It allows for efficient price discovery and reveals the true value of the spectrum rights.
The answer to part (a) affects the answer to part (b) because if the auction were a common value auction, where the value is the same for all bidders, an English auction would be more suitable. In an English auction, bidders openly compete by submitting increasingly higher bids until the auctioneer declares the highest bidder as the winner. This format is effective in situations where the value determination is more transparent and bidders can actively observe and outbid each other. However, since the auction is more likely to be a private value auction, a sealed bid second-price auction is the recommended choice.