Don’t blame Ofcom if the 4G price isn’t right

20th February, 2013

It’s almost 13 years since the UK government raised £22.5bn in one of the biggest auctions of all time, for the right to use radio spectrum for 3G mobile phone services. The next big thing, 4G, has been auctioned for around a 10th of that price, and a third less than the sum the Treasury had pencilled in. What went wrong?
Some say that’s the wrong question: several telecoms analysts claim that the low prices will result in a better deal for consumers, which makes me wonder if they have their wires crossed. Consumer prices are determined by competitive pressure and the marginal cost of supplying services, not by one-off upfront costs. That’s the theory, anyway. For a change, theory and reality are in step: despite the stratospheric price that phone companies paid for the 3G licences, mobile phone services in the UK are cheap.
The lower than expected 4G auction price, then, is bad news for the taxpayer, good news for shareholders, and irrelevant to consumers. And it can’t be a huge shock, because estimates for the 3G auction revenue were even more inaccurate, even if the surprise there was a pleasant one. If we had known what the auction price was going to be, we wouldn’t have needed an auction. The whole point of the auction is to reveal how much bidders want the prize, and to charge them accordingly.
But could Ofcom have designed the auction better? Not obviously so. Good auction design is not magic: it’s about preventing cheating and attracting serious bidders. The 3G auction designers had an opportunity to raise silly money during a bubble, and they did not squander that opportunity. The 4G auction designers lacked the same good fortune, and the merger of two major competitors, T-Mobile and Orange, will not have helped.
The 4G auction, a fancy thing called a “combinatorial clock”, split the available spectrum into bite-sized chunks, each with its own price. Bidders revealed which chunks they wanted at prevailing prices, and prices for the most-demanded chunks rose quickly. Rather than dropping out entirely, the major bidders gradually shrank their demands until everyone could be accommodated. Collusion can never be ruled out in such auctions, but a plausible explanation for the lowish price is the simplest one: bidders simply decided that they could curtail their ambitions if it meant saving money.

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