FTC Staff Comment Before the FCC Concerning Proposed Legislation to Auction Certain Unassigned Radio Spectrum Frequencies

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BUREAU O~ ECONOMICS
FEDERAL TRADE COMMISSION
WASHINGTON, D. C. 20580 	...,;. 	I
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O::tOOer 29, 	19 86
Mark 	S. 	Fowler, 	Esq.
Chai rman
Federal 	Communications
Washington, 	DC 	20554
Dear 	Chairman 	Fowler:
Commission
The Bureaus 	of 	Competition, 	Consumer 	Protection, 	and
Economics 	of 	the 	Federal 	Trade 	Commission 	("FTC 	Bureaus")
appreciate 	this 	opportunity 	to 	review 	legislation proposed by
the 	Federal 	Communications 	Commission 	("FCC").* 	This 	proposal
would 	permit 	the 	F~C to 	auction 	certain 	unassigned frequencies 	in
the 	radio 	spectrum. 	The 	proposal 	would 	not 	affect 	the 	uses 	to
which frequencies 	would 	be 	put; 	the 	FCC would 	continue 	to 	allo-
cate 	portions 	of 	the 	spectrum 	to 	different 	uses 	administratively.
Auctions would 	be 	employed only 	to assign 	licenses 	for 	fre-
quencies 	to 	competing 	users 	after 	the 	FCC has 	determined 	the
appropriate 	use 	of 	a 	portion 	of 	the 	spectrum. 2 	Because 	auctions
have 	substantial 	advantages 	over 	the 	methods 	currently 	used 	to
alloca te 	f requenci es, 	the 	FTC Bureaus 	recommend 	that 	the 	FCC 	be
permitted 	to 	assign 	licenses 	by 	auction.
The FCC proposes that auctions be 	used in place of the two
existing methods 	of 	assigning frequencies: 	comparative hearings
* 	These 	comments 	represent 	the views 	of 	the Bureaus 	of
Economics, 	Consumer 	Protection and Competition and 	do 	not
necessarily 	reflect 	the views of 	the 	Federal 	Trade 	Commission or
any 	individual 	Commissioner. 	The 	Commission, 	however, 	has
authorized 	the 	filing 	of 	these 	comments. 	Inquiries 	regarding
these 	comments 	should 	be 	directed to Jon Ogur, 	Bureau 	of
Economics.
1 	See 	letter 	from 	Chairman Fowler 	to Senator 	Danforth,
dated 	May 1, 	1985.
2 	Under 	the 	FCC 	proposal, 	auctions 	would 	be 	used 	only 	for
the 	ini tial 	assignment 	of 	a 	license; 	subsequent 	transfers 	of 	the
license 	could 	be 	made 	in existing 	resale 	markets. 	Current 	rights
and 	FCC 	regulations 	pertaining 	to 	licenses 	would 	be 	unaffected.
Mass 	media, 	public 	safety, 	and amateur 	services would 	be 	exemptec
from 	initial 	assignment 	by auction. 	Examples 	of 	services 	that
could 	be 	covered 	are 	land mobile 	services, 	such 	as one-way 	paging
and 	two-way 	conventional 	radio 	telephone; 	special 	mobile
services; 	general 	mobile 	services; 	and fixed and mobile domestic
satellite 	services.

and 	lotteries. 3 	In 	our 	view, 	the 	substitution 	of 	a 	market 	method
for 	these 	non-market 	methods 	would yield 	several 	benefits.
Fi rst, 	auctions 	would 	reduce 	the 	substantial 	delays 	that 	existing
methods 	create 	before 	consumers 	receive 	services from 	licensees. 4
Second, 	auctions 	would 	reduce 	the 	governmental 	and 	private 	costs
imposed 	by 	current 	licensing 	procedures. 	Third, 	compared 	to 	both
administrative assignment 	methods, 	auctions 	are 	more 	likely 	to
resul t 	in 1 icense 	awards 	to 	those 	users 	who can best 	satisfy
consumer 	demands. 	Fourth, 	auctions 	would 	provide 	information 	to
the 	FCC 	on 	the 	value 	of 	the 	spectrum 	in 	various 	uses, 	thereby
assisting 	the 	agency 	in 	its 	allocation 	of 	the 	spectrum 	among
uses. 	Finally, 	auctions 	would 	raise 	substantial 	revenues 	for 	the
u.s. 	Treasury. 	In 	sum, 	auctioning 	unassigned 	frequencies 	would
yield 	benefits 	to 	consumers, 	firms, 	and 	taxpayers.
Auctions 	will 	reduce 	the 	substantial 	delays 	in 	providing
service 	to 	consumers, 	and 	the 	substantial 	application 	and
processing 	costs, 	which 	now 	result 	from 	license assignment 	by
non-market 	methods. 	Comparative 	hearings 	force 	firms 	seeking
licenses 	to 	hire 	legal 	and 	engineering 	consultants 	to 	prepare
applications. 	Because 	the 	limited 	supply 	of 	spectrum 	makes 	these
rights valuable, 	firms 	compete for 	them 	by 	incurring 	added
consulting 	costs 	to 	increase 	the 	probabilities 	that 	their
applications 	will 	win. 	To 	evaluate 	the 	applications 	and 	select
the 	winners, 	the 	government 	employs 	expertise 	similar 	to 	that
used 	by 	the 	applicants. 	The 	evaluation 	process 	takes 	months 	or
even 	years, 	during 	which 	time 	consumers 	do 	not 	receive 	the
proposed 	services.
To 	the 	individual 	firm 	seeking 	a 	license, 	the 	cost 	of 	an
apr:;.licaclon for a lottery is lower than the cost of an applica-
tion 	for 	a 	comparative 	hearing. 	However, 	the 	lottery's 	lower
application 	cost 	yields 	a 	larger 	number 	of 	applicants. 	Given 	t~e
value 	of 	the 	license, 	one 	~culc expect 	the 	total 	cost 	to 	all
app::'icants 	to 	be 	~he 	same 	fc:!:" 	both 	methods. 	In 	addition, 	the
government 	incurs 	costs 	to 	process 	the 	greater 	number 	of
app].icationE. 	The 	resulting 	delays 	deprive 	consumers 	of 	desired
serv ices 	for 	months.
3 	In 	comments 	filed 	May 	7, 	l~84, 	before 	the 	FCC, 	the 	FTC
Bureaus 	of 	Economics, 	Consumer 	Protection, 	and 	Competition
proposed 	the 	auction 	of 	satellite 	orbital 	slots 	and 	frequencies
because 	of 	the 	superiority 	of 	this 	method 	to 	hearings 	and
lotteries 	(In 	the 	Matter 	of: 	The 	Processing of 	New 	Domestic
Satellite 	Applications, 	Report 	No. 	DS-265). 	Orbital 	slots 	would
not 	be 	auctioned 	under 	the 	FCC's 	proposal.
4 	In these comments, 	we use the term consumer to refer to
the 	buyer 	of 	services 	produced with 	spectrum 	as 	an 	input. 	Some
buyers 	of 	the 	services 	are 	firms.
2

.. 	A possible way to reduce 	the costs imposed by the large
number 	of applications 	for 	licenses 	awarded 	by 	a 	lottery 	is 	for
the 	government 	to 	charge 	an 	application 	fee. 	The 	correct 	fee
would 	eliminate 	all 	applicants except 	the 	firms 	that would 	use
the 	available 	spectrum 	most 	productively 	in 	satisfying consumers'
wants. 	Determining 	the 	correct 	fee 	administratively would 	be 	an
extremely 	difficult 	task, 	requiring detailed 	knowledge 	of
consumers' 	demand 	for 	services 	and 	the 	costs 	of 	different 	firms
that 	seek 	spectrum 	to 	supply 	those 	services. 	An 	auction would
accomplish 	precisely 	this 	task 	at 	relatively 	low 	cost.
An 	FCC 	staff 	study 	suggests 	that auctions 	would
substantially 	reduce 	the 	total 	costs 	of 	assigning 	licenses,
including 	both 	the 	costs 	to 	~overnment and private 	firms, 	and 	the
delays 	in 	serving 	consumers. 	For 	a 	hypothetical 	cellular
telephone 	market, 	the 	authors estimate 	that an auction 	would
reduce 	costs to approximately one sixth of the costs of either a
comparative 	hearing 	or 	a 	lottery. 	The 	estimated 	savings 	are
approximately 	half 	a 	million 	dollars 	per 	cellular 	market.
comparative 	hearings and 	lotteries 	are 	unlikely 	to 	award
licenses 	to 	the 	firms 	that 	will 	best 	use 	them 	to serve 	consumers.
Hearings 	reward 	firms 	that, 	among 	other 	things, 	hire 	the 	best
consultants 	to 	prepare 	applications. 	These 	firms 	are 	not
necessarily 	the 	ones 	that 	will 	most 	efficiently 	combine 	the
spectrum 	with 	other 	inputs 	to 	produce 	the goods 	and 	services 	that
consumers 	desire 	most. 	We agree 	with your 	assertion 	that
hearings 	may 	not 	provide 	the 	FCC with 	the 	informatton 	needed 	to
identify 	the 	firms 	that 	will 	best 	serve 	consumers. 	Lotteries
reward 	firms 	that 	can ,file applications within 	a 	fixed 	time
period 	and 	that 	are 	lucky. 	Neither 	of 	these 	attributes 	is 	likely
to be reI a 1ed to ef f i ciency in u sing the spe ctr urn to se rve
consumers. 	As 	a 	result, 	the 	initial 	assignment 	of 	licenses 	by
hearings 	or 	lotteries 	is 	likely 	to 	be 	inferior 	to 	the 	initial
assi gnm ent 	by 	aucti ons.
Letter 	from 	Chairman 	Fowler 	to Senator 	Danforth.
5 	See
Licensees, "
May 	1985.
6
Kwerel 	and 	Felker, 	"Using 	Auctions 	to 	Select 	FCC
FCC 	Office 	of 	Plans 	and 	Policy 	Working 	paper 	No. 	16,
7 	The 	FCC 	has 	attempted 	to 	reduce 	the 	number 	of 	applicants
for 	lotteries 	by 	restricting 	the 	time 	period 	during 	which
applications 	may 	be 	filed. 	Such 	a 	restriction 	could 	exclude
firms 	that would 	use 	spectrum 	more 	productively 	to 	serve
consumers 	than 	would 	some 	successful 	applicants.
3

The 	consumer 	losses 	caused 	by 	the 	misallocation 	of 	licenses
by 	non-market 	methods 	will 	take 	the 	form 	of 	transactions 	costs
required 	to 	transfer 	the 	misassigned 	licenses 	in existing 	resale
markets. 8 	These 	transactions 	costs 	would 	be 	avoided 	if 	auctions
were 	used 	to 	assign 	licenses 	correctly 	in 	the 	first 	place. 	In 	an
auction, 	firms 	will 	bid what 	they 	think 	they 	can 	recover
(including a 	return 	on 	their 	investment) 	from 	consumers 	of 	the
services 	that 	will 	be 	provided with 	the 	licenses. 	Firms 	that
expect 	to 	provide more valuable 	services 	to 	consumers 	will 	bid
more 	for 	licenses. 	Firms 	that 	are 	more 	efficient 	at 	combining
the 	spectrum 	with 	other 	inputs 	to 	provide 	services 	will 	tend 	to
bid more 	than 	will 	less 	efficient 	firms. 	In 	sum, 	auctions 	will
assign licenses 	to 	firms 	that 	are 	efficient 	at 	using 	the 	spectrum
to 	supply 	the 	goods 	and 	services 	that 	consumers 	desire 	most.
Absent 	auctions, 	the 	FCC 	has 	relatively 	little 	hard 	data 	to
guide 	its 	allocation 	of 	unused 	spectrum 	to 	new 	uses. 	The 	bids
obtained 	through 	auctions 	would 	help 	fill 	this 	gap. 	Firms
seeking 	licenses 	will 	bid 	what 	they 	think 	they 	can 	recover
(including 	a 	return 	on 	their 	investment) 	from 	consumers 	of 	the
services 	that 	will 	be 	provided. 	Thus, 	the 	bids 	reflect 	firms'
estimates 	of 	the 	value 	of 	the 	services 	to 	consumers. 	If 	the 	bids
for 	new 	use 	A are higher 	than the bids for 	new 	use B, 	that
indicates 	that, 	at 	the 	margin, 	consumers 	of 	A value 	the 	services
of 	the spectrum more than do consumers of B. 	We believe that
such information would be useful to the FCC in its future
decisions 	regarding 	the 	allocation of 	unused 	spectrum 	between
such 	new 	uses.
We 	agree 	with 	your 	assertion 	that 	auctions 	would 	raise
su~stantial revenUtS 	for 	the 	Treasury, 	thereby 	reducing 	the
budget 	deficit. 9 	The 	initial 	assignment 	of 	licenses 	currently
br:ings 	in 	no 	government 	revenues. 	Subsequent 	resale 	of 	the
licenses 	provides 	the 	initial 	holder 	with 	the 	equivalent 	of 	the
revenues 	that 	an 	auction 	would 	earn 	for 	the 	Treasury.
What 	disadvantages 	might 	auctions entail? 	We are aware 	of
three 	concerns. 	First, 	it 	has 	been 	suggested 	that 	auctions 	could
enable 	firms 	to 	pursue 	a 	strategy 	of 	monopolizing 	the 	radio
8 	Transfers are subject to approval 	by the FCC and in some
instances 	to 	other 	restrictions, 	such as 	a 	minimum 	holding 	period
by 	the 	original 	licensee 	before 	transfer 	(see 	Kwerel 	and 	Felker,
p. 	8).
In 	some 	instances, 	the 	transactions 	costs may 	be 	greater
than 	the 	gains, 	and 	thus 	some 	beneficial 	transfers 	may 	not 	be
made.
9 	Letter 	from 	Chairman 	Fowler 	to Senator 	Danforth.
4

, .. spectr~m. 	Second, 	it 	has 	been 	argued 	that 	auctions 	could 	reduce
minori ty 	ownership of 	licenses. 	Finally, 	some 	have 	hypothesized
that 	auctions 	could 	enable 	large 	firms 	to bid 1 icenses away 	from
small 	firms. 	In 	our 	view, 	these 	concerns 	can 	be 	laid 	to 	rest.
The 	purchase 	of 	licenses 	to 	obtain market 	power 	does not
appear 	tv 	be 	a 	feasible 	business 	strategy. 	If 	such 	a 	strategy
were 	possible, 	we 	would expect 	to 	see 	attempts 	to 	implement 	it 	in
existiQg 	resale 	markets. 	However, 	we 	are 	aware 	of 	no 	evidence 	of
such 	attem p ts
6 and 	we 	see 	no 	reason why 	auctions would make 	them
more 	likely.1 	Even 	if 	a 	spectrum 	monopolization 	strategy 	were
tried, 	antitrust 	review 	of 	resale 	market 	transfers and 	of 	auction
assignments 	could 	easily 	detect 	it 	and 	prevent 	its 	success. ll
Because 	of 	the 	existence 	of 	resale 	markets, 	auctions 	will
have 	no 	significant 	effect 	on 	the 	ultimate 	minority 	ownership of
licenses. 	Regardless 	of 	the 	method 	of 	initial 	assignment 	of
licenses, 	resale 	market 	transfers 	largely 	determine 	the 	final
holders 	of 	those 	licenses. 	Those 	holders 	tend 	to 	be 	the 	firms
that 	are 	most 	efficient 	at 	serving 	consumers' 	wants.
With 	regard 	to 	small 	firms, 	we are 	aware 	of 	no 	evidence 	that
efficiency 	in 	the 	use 	of 	the 	spectrum 	to 	serve 	consumers 	is
related 	to 	firm 	size. 	Absent 	such 	a 	relationship, 	small 	firms
will 	be 	able 	to 	compete effectively 	with 	large 	firms 	in auctions,
as they now do in resale markets. 	The market for 	satellite
transponder 	r1rvices 	currently 	provides 	an example 	of 	such
competition. 	In 	that 	market, 	firms 	of 	different 	sizes
currently 	compete 	effectively. 	This 	competition 	suggests 	that
small firms would be able to obtain licenses in an auction.
If 	Congress wishes 	to assign licenses to 	small 	firms, 	or 	to
minority 	owners, 	at 	a 	level 	greater 	than 	that yielded 	by 	the
resale 	market, 	then 	a 	relatively 	efficient way 	to 	implement 	that
10 	Kwerel 	and 	Felker, 	pp. 	10-11.
11 	In 	the 	production 	of 	some 	services, 	coaxial 	cable 	and
fiber 	optic 	cable 	are 	substitute 	inputs 	for 	the 	spectrum. 	These
al terna ti ves 	make 	the achievement 	of 	s-ignif ica nt 	marke t 	power
through 	the 	purchase 	of 	licenses 	even 	less 	likely.
12 	A transponder 	is 	the 	device 	on 	a 	satellite 	that 	receives
a 	weak 	radio 	signal 	transmitted from 	an 	earth 	station on 	a
particular 	frequency, 	amplifies 	the 	signal, 	and 	then 	transmits 	it
back 	to 	the 	earth 	on 	a 	different 	frequency 	(FTC Bureaus' 	Comments
Before 	the 	FCC, 	p. 	14).
5

desire 	is 	by 	subsidy. 	Small 	firms, 	or 	minority-owned firms,
c<:,uld 	be 	~~ven subsidies 	to 	purchase 	the 	desired 	number 	of
llcenses.
We 	agree 	with 	the 	FCC 	that 	existing licenses 	should not 	be
subject 	to auction 	as 	part 	of 	the 	renewal 	process. 	Auctions 	of
existing 	licenses 	are 	not 	necessary 	to 	correct 	any 	inefficient
initial 	license 	assignment. 	Resale 	markets 	can 	be 	relied 	upon 	to
improve 	the 	ownership 	pattern 	of 	licenses 	if 	changing conditions
make 	the 	initial 	pattern 	inefficient. 	For 	example, 	changing
demand 	and 	cost 	conditions 	could make 	other 	patterns of 	ownership
more 	efficient 	than 	the 	initial 	pattern. 	Resale 	market 	transfers
shift 	ownership 	to 	such 	a 	more 	efficient 	pattern. 	In 	these
transfers, 	license holders 	sell 	their licenses 	to 	firms 	that 	will
more 	efficiently 	serve 	consumers. 14
The 	voluntary 	aspect 	of 	resale 	market 	transfers ensures 	that
all 	parties 	are 	made 	better 	off. 	The 	buyer 	is 	willing 	to 	pay
more 	than 	the 	value 	of 	the 	license 	to 	the 	current 	licensee. 	This
greater 	willingness 	to 	pay 	results 	because 	the 	buyer 	expects 	to
use 	the 	license 	more 	productively 	to 	serve 	consumers' 	wants. 	To
the 	seller, 	the 	money 	obtained from 	thy 	sale 	of 	the 	license 	would
be 	more 	profitably 	invested 	elsewhere. 	5
Moreover, 	auctioning 	existing licenses 	could 	impose 	costs 	on
consumers. 	Initial 	holders 	of 	licenses make 	investments 	in the
development 	of 	markets 	for 	the 	services 	produced 	with 	the
spectrum. 	Some 	examples 	of 	such 	investments are 	research 	into
13 	Tax 	certificates 	are 	a 	form 	of 	subsidy 	that 	currently
encourages 	the 	sale 	of 	licenses 	to 	minorities 	and 	to 	women.
14 	Because 	of 	the 	benef its 	of 	a 	resale 	market, 	FTC 	staff
has 	s~pported the 	creation 	of 	such 	a 	market 	for 	airport 	take-off
and 	landing 	rights 	(slots). 	See 	D. 	Koran 	and 	J. 	Ogur, 	Airport
Access 	probl~ms: Lessons 	Learned 	from 	Slot 	Regulation 	by 	the 	FAA,
Bureau 	of 	Economics 	Staff 	Report 	to 	the 	Federal 	Trade 	Commission,
May 	1983.
It 	is 	worth 	noting 	that 	the 	existence 	of 	auctions and 	resale
markets will 	not 	affect 	the 	prices 	paid 	for 	the 	services 	produced
using 	the 	spectrum. 	Those 	prices 	reflect 	the 	scarcity 	value 	of
the 	spectrum 	even 	in 	the absence 	of 	such 	market 	mechanisms 	(see
Koran 	and 	Ogur, 	pp. 	32-34, 	for 	a 	discussion 	of 	this 	point 	in
regard 	to 	cash 	sales 	of 	airport 	slots).
15 	Our 	conclusion 	that 	voluntary 	license 	transactions
benefit 	consumers holds 	whether 	or 	not 	there 	is 	speculation 	in
licenses. 	If 	a 	speculator 	purchases 	a 	license, 	he 	can earn a
profit only if he 	sells the license to a firm 	that will 	use
spectrum 	more 	productively 	to 	serve 	consumers.
6

the 	type 	of 	services 	that 	consumers want and 	communication 	of
information 	to 	consumers 	regarding 	the 	services 	to 	be 	offered.
These investments 	provide 	benefits 	to 	consumers 	and yield 	returns
to 	the 	initial 	licensee. 	If 	existing 	licenses 	were 	subject 	to
auction at 	the 	time 	of 	renewal, 	the 	government, 	rather 	than 	the
original 	licensee, 	could 	capture 	a 	portion 	of 	the 	return 	from
these 	investments. 	In 	that 	case, 	the 	firm 	would 	be 	discouraged
f rom 	making 	such 	investments, 	and consumers would lose 	the
benefits.
By 	contrast, 	absent 	such 	an 	auction, 	the 	original 	licensee
has 	a 	better 	chance 	of 	recouping 	its 	investment. 	To 	the 	extent
that 	prospective 	buyers 	in 	the 	resale 	market 	can earn a 	portion
of the returns, 	they will be willing to pay more for 	the license
because 	the 	original 	license 	holder 	made 	the 	investment. 	In 	sum,
limiting auctions 	to 	the 	original 	assignment 	of 	a 	license 	will
encourage 	investments 	that 	benefit 	consumers.
The 	FCC's 	proposed 	use 	of 	auctions 	to 	assign 	unused
frequencies 	would 	substitute an efficient 	market mechanism 	for
the 	existing 	inefficient 	non-market 	assignment 	procedures.
Taxpayers, 	firms 	that 	seek 	spectrum 	licenses, 	and consumers of
services 	produced with 	the 	spectrum 	would 	all 	gain. 	The 	use 	of
auctions 	to 	assign 	spectrum 	licenses would add to 	the 	growing
list 	of 	scarce 	commodities 	allocated 	by 	the 	government 	using
efficient 	market 	mechanisms. 	This 	list 	currently 	includes 	outer-
continental-shelf 	oil 	leases, 	federal 	coal 	leases, 	Treasury
bills, 	geothermal 	leases, 	and 	airport 	slots. 	The 	FTC Bureaus
recommend 	that 	Congress 	enact 	the 	FCC's 	proposed 	legislation.
Respectfully,
O~'-Vr S-~:--
David 	T. 	scheffman
Di rector
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