The FCC Rules for the 700MHZ Auction: A Potential Disaster

Abstract

In July 2000 the FCC issued the rules to govern the upcoming 700MHz auction. The rules are a departure from the auction architectures previously used by the FCC. Rather than all bidding only on individual licenses, the auction participants will be able to bid on combinations or packages of licenses. Several combinatorial auction processes exist in the literature and testing demonstrates that such processes have a potential for substantially increasing the efficiency of the auction. While combinatorial auction systems have been studied in various forms, indeed a particular auction architecture was developed and studied extensively for the FCC, the rules that emerged from the FCC deliberations are unlike any that have ever been implemented before. The purpose of this note is to call attention to the fact that the particular rules developed by the FCC hold the potential for tarnishing the long history of successful auctions within the FCC. The questions posed in the pages that follow are; (i) Will the auction perform efficiently? (ii) Does the FCC have the tools to accelerate the auction or hasten its timely termination? (iii) Will the auction architecture scale up? The thesis of this paper is that the answer to all three of these fundamental questions is "no". At base the auction rules rest on an inappropriate set of principles. The principles and the intuition drawn from those principles might serve well when the auction is restricted to bids on individual items but when the bids can be on packages of items the principles simply do not apply. The first section of this note outlines the rules. The second section lists problems that can evolve from the implementation of the rules. The third section contains observations about the sources of the problems caused by the rules and the final section suggests changes in the rules that will remove all of the problems listed.

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