2 - An Equilibrium Analysis of the Simultaneous Ascending Auction

Summary

Introduction

In recent years, governments around the world have employed auctions to award licenses for the rights to operate in certain markets. The spectrum auctions conducted by the US Federal Communications Commission (FCC) provide a particularly prominent example. In the FCC auctions, telecom firms compete for blocks of frequencies (typically on the order of 10-20 MHz) defined over certain geographic areas. The format pioneered by the FCC is the simultaneous ascending auction (SAA), which is a dynamic, multi-round format in which the items are put up for sale simultaneously and the auction closes only when bidding on all items has stopped. The SAA has become the standard to conduct large-scale, large-stakes spectrum auctions and has generated close to $80 billion for the US Treasury and hundreds of billions worldwide.

An important property of the SAA is that when items are substitutes and bidding is “straightforward,” i.e. in each round of the auction bidders place minimum acceptable bids on those licenses that provide the highest current profits, then prices converge to competitive equilibrium prices and a fully efficient outcome results (Milgrom [18]; Gul and Stacchetti [14]). However, in many of the FCC auctions there are synergies between licenses for adjacent geographic regions, and bidders’ values for combinations of licenses exceed the sum of individual license values. For example, the bid regressions reported by Ausubel, Cramton, McAfee, and McMillan [2] show that the highest losing bid on a license is higher if the bidder who placed the bid has won or eventually wins a license. Bajari and Fox [5] apply a structural econometrics model to data from FCC auction #5 and find evidence for substantial value complementarities: they estimate that the value of a nationwide package is 69% more than the sum of underlying values. Value complementarities were considered even more important in the recently conducted FCC auction #73, where potential entrants, e.g. Google, competed against established incumbents such as Verizon and AT&T for highly valuable 700MHz spectrum.