Thomas W. Hazlett

Assigning Property Rights to Radio Spectrum Users: Why Did Fcc License Auctions Take 67 Years?*

While Leo Herzel (1951) and Ronald Coase (1959) persuasively argued for auctioning licenses issued by the Federal Communications Commission (FCC), not until 1993 did the U.S. Congress grant the FCC authority to assign wireless operating permits via competitive bidding. Why were auctions, with obvious efficiency and equity advantages, so long in coming? Why were comparative hearings in the “public interest” first abandoned as assignment tools in 1981 not for auctions, but for lotteries? And why were radio and TV licenses pointedly excluded from auctions? Four factors—the special interest of regulators in influencing broadcasting content, the limits placed on explicit program regulation by the U.S. Constitution, the recent increase in the relative economic importance of nonbroadcast wireless services, and the agency problem embedded in central planning—are used to explain both the political stability of economically inefficient licensing methods and recent reforms.

A welfare analysis of spectrum allocation policies

Economic analysis of spectrum policy focuses on government revenues derived via competitive bidding for licenses. Auctions generating high bids are identified as successful and those with lower receipts as fiascoes. Yet spectrum policies that create rents impose social costs. Most obviously, rules favoring monopoly predictably increase license values but reduce welfare. This article attempts to shift analytical focus to efficiency in output markets. In performance metrics derived by comparing 28 mobile telephone markets, countries allocating greater bandwidth to licensed operators and achieving more competitive market structures are estimated to realize efficiencies that generally dominate those associated with license sales. Policies intended to increase auction receipts (e.g., reserve prices and subsidies for weak bidders) should be evaluated in this light. Copyright (c) 2009, RAND..

Property Rights and Wireless License Values

Abstract While extending the scope of spectrum property rights promotes efficiency, such reforms are often deterred by equity concerns. Theoretically, however, the windfalls may be negative. Relaxing license restrictions may increase profits by allowing enhanced productivity, yet liberalization across a class of licensees can reduce the expected profits by increasing competitiveness. This article examines license value changes for regimes that decisively shift toward private property rights in radio spectrum by analyzing the average prices paid in international cellular phone license auctions during 1995–2001. This unique data set encompasses 1,365 licenses assigned by competitive bidding in 38 auctions held in 24 countries. Licenses awarded by regimes with more expansive spectrum property rights generated winning bids that were 61 percent lower, adjusting for other factors. This evidence reverses the equity argument against liberalization over the policy margin studied and is consistent with Coase’s view...

Property Rights to Radio Spectrum in Guatemala and El Salvador: An Experiment in Liberalization

In most countries, wireless communications rely on administrative allocation of radio spectrum. The inefficiencies associated with this centralized approach have led economists, starting with Coase in 1959, to suggest propertyzing radio spectrum. Critics of this approach assert that property rights impose prohibitive transaction costs and inhibit development of wireless services. Reforms enacted in Guatemala (in 1996) and El Salvador (in 1997) have largely implemented policies suggested by Coase, yielding a natural experiment. Evidence generated in the mobile telephone market suggests that these regimes are associated with relatively efficient policy outcomes, including abundant spectrum availability and a high degree of competitiveness, and with correspondingly low retail prices and high rates of output (minutes of use). Further, such markets appear to avoid high transaction costs in the public or private sectors. We conclude that these liberal reforms tend to produce results consistent with Coases policy conjecture.

The Spectrum-Allocation Debate: An Analysis

The standard approach to radio-spectrum allocation in the US posits three alternative models from which regulators choose (on a case-by-case basis) to impose basic rules for coordinating wireless activities. However, this regulatory framework often yields anticonsumer outcomes. The author argues that public policy should instead permit competitive market forces to allocate airwave rights among rival users. One mechanism for accomplishing this shift is to move away from administrative allocations to a general regime of exclusive property rights

Spectrum Flash Dance: Eli Noam's Proposal for “Open Access” to Radio Waves

As Ronald Coase posited in his famous article on the nature of the firm, there are situations in which decentralized markets are relatively efficient for coordinating economic activity, and situations in which they are not. With spectrum access, assigning property rights to clearly specified private owners is the socially efficient policy because the relevant transaction efficiencies will be internalized by competitive “spectrum owners” selecting to what degree rights should be subdivided and in what manner marketed. Where spot markets are optimal, an owner will maximize profits by using them; where long‐term contracts are efficient, the owner will enter profitably into them. Hence, Eli Noams solution—imposing open‐access rules on bands of radio frequencies by government mandate—is a mistaken attempt to duplicate the efficiencies of markets by mandating a particular subset of market solutions. Such a policy predictably will result in underutilization of the spectrum resource.

''Open access:'' the ideal and the real

Abstract “Open access” would allow ISPs to use a cable operators broadband connection under regulated terms and conditions. Advocates stress the desirability of an “end-to-end” architecture for the Internet and the danger that cable operators will use their control over the last mile to limit consumer choice and stifle innovation. Opponents contend that wholesale price controls and other regulatory burdens under what they term “forced access” would in fact slow down the deployment of broadband, stifle innovation and harm consumers. The fears of “open access” advocates seem largely speculative at this point. Evidence from related policies also favors the opponents. “Closed” cable systems are beating their “open” DSL competitors in the market place; analogous regulation of cable TV did not serve consumers well; and forced “unbundling” of local service has been controversial and largely ineffective. In addition, relevant technology stocks declined in price with political and legal victories for “open access” and increased when it suffered setbacks.

Cable Television Rate Deregulation

In the 1984 Cable Communications Policy Act, cable television operators were effectively freed from rate regulation, and subsequently enjoyed monopoly franchise protection with free market pricing. In 1992, however, reregulation of basic cable service rates was established in the Cable Consumer Protection and Competition Act. The argument for reimposing regulation was that a substantial increase in basic cable rates had occurred post-deregulation. Yet the efficacy of rate controls upon an industry which has substantial freedom to adjust product quality is theoretically ambiguous. This study examines simple price, quality, and output evidence to determine how rate deregulation impacted consumers. It finds support for the view that rate controls did not lower quality-adjusted prices and are best explained as tools for influencing rent distribution across interest groups

The Law and Economics of Network Neutrality

The Federal Communications Commissions Network Neutrality Order regulates how broadband networks explain their services to customers, mandates that subscribers be permitted to deploy whatever computers, mobile devices, or applications they like for use with the network access service they purchase, imposes a prohibition upon unreasonable discrimination in network management such that Internet Service Provider efforts to maintain service quality (e.g. mitigation congestion) or to price and package their services do not burden rival applications. This paper offers legal and economic critique of the new Network Neutrality policy and particularly the no blocking and no discrimination rules. While we argue the FCC‘s rules are likely to be declared beyond the scope of the agencys charter, we focus upon the economic impact of net neutrality regulations. It is beyond paradoxical that the FCC argues that it is imposing new regulations so as to preserve the Internets current economic structure; that structure has developed in an unregulated environment where firms are free to experiment with business models - and vertical integration - at will. We demonstrate that Network Neutrality goes far further than existing law, categorically prohibiting various forms of economic integration in a manner equivalent to antitrusts per se rule, properly reserved for conduct that is so likely to cause competitive harm that the marginal benefit of a fact-intensive analysis cannot be justified. Economic analysis demonstrates that Network Neutrality cannot be justified upon consumer welfare grounds. Further, the Commissions attempt to justify its new policy simply ignores compelling evidence that “open access�? regulations have distorted broadband build-out in the United States, visibly reducing subscriber growth when imposed and visibly increasing subscriber growth when repealed. On the other, the FCC manages to cite just one study - not of the broadband market - to support its claims of widespread foreclosure threats. This empirical study, upon closer scrutiny than the Commission appears to have given it, actually shows no evidence of anti-competitive foreclosure. This fatal analytical flaw constitutes a smoking gun in the FCCs economic analysis of net neutrality.

Spectrum Allocation in Latin America: An Economic Analysis

Like elsewhere in the developing world, wireless markets now play a crucial role in Latin American economic growth. Mobile telephone networks increasingly provide the communications infrastructure that has largely been lacking throughout the region. Yet, governments have generally made only modest allocations of bandwidth available to Latin American wireless operators, either absolutely (in terms of spectrum each country could allocate) or relative to other countries in Asia or the European Union. Using an empirical model estimated on mobile phone data for 40 international markets, we show that very large social gains are available to countries that succeed in permitting more liberal use of radio spectrum. Two of the most striking examples of this approach are Guatemala and El Salvador, each of which utilizes about 50% more bandwidth for mobile telephony than the Latin American mean. We conduct simulations, using our calibrated model, to project country-by-country gains from expanding access to radio spectrum. Substantial efficiency increases are possible, which dominate gains associated with extracting public funds via auctions, the area of focus in the economic literature.