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«The Effect of Incumbent Bidding in Set-Aside Auctions: An Analysis of Prices in the Closed and Open Segments of FCC Auction 35 Peter Cramton ...»

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7. The Commission has subsequently ruled that Nextel and other SMR providers operate in an antitrust market distinct from the mobile telephony market. At the time of Auction 35, however, SMR spectrum counted against the CSMR spectrum cap. However, it is likely that this is a special case; the FCC explicitly considers SMR to be part of CSMR in the spectrum cap proceeding.

8. As of the summer of 2000, roughly 40 percent of all U.S. wireless telecommunications consumers were served by at least four PCS (non-cellular) providers.9. For a concise review of the FCC’s rules and licenses for sale in Auction 35, visit the FCC’s Auction 35 web page http://wireless.fcc.gov/auctions/35/factsheet.html.

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11. According to its 10-K filing with the Securities and Exchange Commission in 2000, AT&T reported assets of $169.406 billion at the end of 1999—339 times the $500 million asset threshold allowed by the Commission rules. AT&T also reported operating revenues of $62.4 billion at the end of 1999—499 times the $125 million revenues threshold allowed by the Commission rules. AT&T CORP., S.E.C. FORM 10-K (filed Mar. 27, 2000).

12. The FCC believes that by doing so, it would allow any objecting party to permanently postpone the auction. See, e.g., Allegheny Communications Inc. v. FCC, No. 00-1524 (D.C. Cir.

Dec. 11, 2000).

13. AT&T CORP., S.E.C. FORM 10-K405/A at *1 (filed Apr. 17, 2001) (“If the FCC determines that Alaska Native Wireless was not qualified, the FCC could refuse to grant Alaska Native Wireless the closed licenses. If this occurs, it could have a significant adverse impact on AT&T Wireless Group's ability to provide or enhance services in key new and existing markets.”).

14. AT&T CORP., S.E.C. FORM 10-K405/A at *1 (filed Apr. 17, 2001) (“…the other owners of Alaska Native Wireless have the right to require us to purchase their equity interests. If this right were exercised five years after license grant, the price could be as much as approximately $950 million and would be payable, at our option, in cash or marketable securities.”).

–  –  –

16. AT&T WIRELESS SERVICES INC., S.E.C. FORM 10-Q (filed Aug. 14, 2001) (“In January 2001, the auction was completed and ANW was the high bidder on approximately $2.9 billion in licenses. AT&T Wireless Services has committed to fund $2.6 billion to ANW to fund ANW’s purchase of licenses.”).

17. Population figures are based on 1990 census data.

18. A bidder’s reservation price is the highest price that the bidder is willing to pay for a particular license. Notwithstanding other strategic considerations such as reducing demand or pursuing synergies across multiple licenses, a bidder will continue bidding on a license until the price of the license exceeds his reservation price (Milgrom and Weber, 1982:50). Therefore, the bidder with the highest reservation price generally wins the license. By reserving certain licenses for small entrepreneurs, the FCC sacrificed efficiency (the highest-value bidder would not win the license) for the sake of promoting entry.

19. Salmon PCS reduced activity from two licenses in New York to one license at a price of $511 million for each license, and reduced activity from one license in New York to no licenses in New York at a price of $1.41 billion.

20. For a more thorough review of the rules in FCC spectrum auctions, see Cramton, 1997.

21. MHzPop is the appropriate measure of quantity, because it captures the persons (pops) you can address with useable bandwidth (MHz).

22. Alaska Native raised its own high bid only once. In round 42 Alaska Native raised its own high bid on the C block New York City license.

23. There were in fact 101 auction rounds, the last round containing no new bids. Therefore, the demand curve between round 100 and round 101 is the same mapping of price to quantity, and is superfluous.

24. For this analysis the model uses Alaska Native’s demand for AT&T’s demand, and excludes bids made by “AT&T Wireless” in the auction. The reason for this exclusion is that AT&T wireless dropped out of the auction in round 32, after bidding on Bismark, ND, Fairbanks, AK, and Walla Walla, WA. Thus, it is clear that AT&T was willing to drop out of the auction, knowing that Alaska Native would win spectrum on its behalf. Therefore, AT&T’s sincere demand is represented by Alaska Native’s bids.

25. Results are almost identical if one instead analyzes the unsmoothed demands. Notes of these results will be made throughout the remainder of the paper.

26. The mean and standard deviation of the predicted values are 20.36 and 0.54 respectively.

The standard errors of the forecast have a mean of 0.11 and a standard deviation of 8.0x104. In addition, the minimum and maximum values of these errors are 0.1096 and 0.113 respectively.

Thus, it is likely that the prediction of AT&T’s full demand for spectrum in the open is accurate.

27. These disturbances have a mean of 0.017, a standard deviation of 0.006, and extreme values of 0.0128 and 0.0349.

28. The exact quantity was 2,321,982,450 MHzPop.

29. This amount likely understates the savings on those 425 million MHzPop, because AT&T tended to bid on, and win, the more attractive licenses at auction. The prices for these licenses were often higher, on a MHzPop basis, than the average price for spectrum at auction.





Thus, the price of $5.24 is probably lower than what AT&T would have paid for spectrum had it only been allowed to bid on the open licenses.

30. For a detailed explanation of the de facto standard, see the Commission’s affiliation rule at 47 C.F.R. § 1.2110(b)(4); see also Ellis Thompson Corp., 10 FCC Rcd. 12,554, 12,555-56 (1994), in which the Commission identified the following factors used to determine control of a business: (1) use of facilities and equipment; (2) control of day-to-day operations; (3) control of policy decisions; (4) personnel responsibilities; (5) control of financial obligations; and (6) receipt of monies and profits; Intermountain Microwave, 12 FCC 2d. 559 (1963), and Application of Baker Creek Communications, LP, For Authority to Construct and Operate Local Multipoint Distribution Services in Multiple Basic Trading Areas, Memorandum Opinion and Order, 13 FCC Rcd. 18,709 (rel. September 23, 1998).

31. IN THE MATTER OF IMPLEMENTATION OF THE COMMERCIAL SPECTRUM

ENHANCEMENT ACT AND MODERNIZATION OF THE COMMISSION’S COMPETITIVE

BIDDING RULES AND PROCEEDURES, 21 F.C.C.R. 4753, 4763 WT Docket No. 05-211 (rel.

April 25, 2006).

REFERENCES Ayres, Ian, and Peter Cramton. 1996. “Deficit Reduction Through Diversity,” 48 Stanford Law Review 761-815.

Bajari, Patrick, and Fox, Jeremy T. 2005. “Complementarities and Collusion in an FCC Spectrum Auction,” NBER Working Paper 11671.

Bresnahan, Timothy F., and Steven C. Salop. 1986. “Quantifying the Competitive Effects of Production Joint Ventures,” 4 International Journal of Industrial Organization 155-175.

Cramton, Peter. 1997. “The FCC Spectrum Auctions: An Early Assessment,” 6 Journal of Economics and Management Strategy 431-495.

Csirik, Janos A. 2002. “Do Auction Discounts Reduce Revenues? Evidence from the FCC’s Auction No. 35,”AT&T Labs – Research.

Gilo, David. 2001. “The Anticompetitive Effects of Passive Investment,” 99 Michigan Law Review 1-47.

Milgrom, Paul R., and Robert J. Weber. 1982. “A Theory of Auctions and Competitive Bidding,” 50 Econometrica 1089-1122.

Reynolds, Robert J., and Bruce R. Snapp. 1986. “The Competitive Effects of Partial Equity Interests and Joint Ventures,” 4 International Journal of Industrial Organization 141-153.

Salop, Steven C. and Daniel O’Brien. 2000. “Competitive Effects of Partial Ownership: Financial Interest and Corporate Control,” 67 Antitrust Law Journal 559-605.

Werden, Gregory J. and Luke M. Froeb, “Simulation as an alternative to Structural Merger Policy in Differentiated Products Industries,” in The Economics of the Antitrust Process (Malcolm Coate and Andrew Kleit, eds., Kluwer 1996).

Department of Justice and Federal Trade Commission, 1992 Horizontal Merger Guidelines, at § 1.0.

FCC News Release, Wireless Telecommunications Bureau Announces the Return to Active Status of Licenses to NextWave Personal Communications Inc. and NextWave Power Partners Inc., Subject to the Outcome of Ongoing Litigation (Aug. 31, 2001) http://wireless.fcc.gov/auctions/35/releases/da012045.txt.

“FCC Offers ‘Opt-Out’ Plan,” Unstrung, Light Reading Inc., September 16, 2002.

FCC Public Notice, Minimum Opening Bids, Upfront Payments and Other Procedural Issues For Final Auction Inventory Report No. AUC-00-35-E at § II.C.1 (released Oct. 5, 2000).

FCC Public Notice, C and F Block Broadband PCS Spectrum Auction Scheduled for November 29, 2000, Rescheduled for December 12, 2000 (released Sept. 6, 2000).

FCC Public Notice, C and F Block Broadband PCS Auction Closes; Winning Bidders Announced; Down Payments Due February 12, 2001, FCC Forms 601 and 602 Due February 12, 2001; Ten-Day Petition to Deny Period (released Jan. 29, 2001).

FCC Report, Sixth Report and Order, Implementation of Section 309(j) of the Communications Act PP Dkt. No. 93-253 36 (released July 18, 1995).

FCC Report, Amendment of Part 1 of the Commission’s Rules — Competitive Bidding Procedures, WT Docket No. 97-82, Order on Reconsideration of the Third Report and Order, Fifth Report and Order, and Fourth Further Notice of Proposed Rule Making, FCC 00-274 (rel. August 14, 2000) (“Part 1 Fifth Report and Order”).

FCC Report, Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services: Fifth Report, Federal Communications Commission, at 90 (released Aug. 18, 2000).

FCC Report, Sixth Report and Order and Order on Reconsideration, Amendment of the

–  –  –

Communications Services (PCS) Licensees, WT Dkt. No. 97-82, at 3 (released Aug. 29, 2000).

FCC Small Entity Compliance Guide, Advanced Wireless Service Spectrum, DA 06-1612, WT Docket No. 02-353, ET Docket No. 00-258 (August 9, 2006).

FCC Statement of Commissioner Michael J. Copps, RE: Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Second Report and Order and Second Further Notice of Proposed Rule Making.

FCC Statement of Commissioner Michael J. Copps, RE: Service Rules for Advanced Wireless Services in the 1.7 GHz and 2.1 GHz Bands (Order on Reconsideration).

Letter to FCC Chairman Michael K. Powell, August 16, 2002.

“NextWave Auction High Bidders Are Now Winners,” Bride, Andrew G., and Todd, Kathryn Comerford. Wireless Watch, Newsletters. December 2002.

NextWave Personal Communications v. Federal Communications Commission, 254 F.3d 130 (D.C. Cir., June 22, 2001).

NextWave Personal Communications v. Federal Communications Commission, 537 U.S. 293 (January 27, 2003).

TABLES

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