9 - Market Design and the Evolution of the Combinatorial Clock Auction

Summary

The combinatorial clock auction (CCA) is an important recent innovation in market design. It has progressed rapidly from a 2003 academic paper to real-world adoption. In the past few years, it has been used for more major spectrum auctions worldwide than any other auction format. As such, the CCA is the first format that has the potential to eclipse the simultaneous multiple-round auction (SMRA) as the standard for spectrum auctions.

The defining characteristic of the CCA is a two-stage bidding process. The first stage is a dynamic clock auction: the auctioneer announces prices for the items in the auction; and bidders respond with quantities desired at the announced prices. Bidding in this stage progresses in multiple rounds as prices increase until aggregate demand is less than or equal to supply for every item. In the second stage, bidders have the opportunity to submit a multiplicity of supplementary bids, both to improve upon their bids from the clock rounds and to express values for other packages.

Following the second stage, the bids from both the clock rounds and the supplementary round are entered into winner determination and pricing problems. The winner determination problem treats these bids as package bids, and determines the value maximizing allocation of the items among the bidders. The pricing problem is based on second-price principles.

In most applications, there is also a third stage of bidding. Generally, several items in the auction are treated as identical during the first two stages. For example, in the European digital dividend auctions, there have generally been six distinct licenses offered in the 800 MHz band. In the auction's first two stages, bidders simply indicate quantities of “generic” 800 MHz spectrum that they wish to purchase. The third stage takes bidders’ winnings of generic spectrum as given, and bidders express values for specific 800 MHz licenses. Thus, it determines the assignment from generic spectrum to physical frequencies.