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India’s failure with its recent 2g auction. Who’s to blame?

In 2010, Indian government had unexpectedly, but proudly, set record revenue of 677 billion rupees (approximately U.S. $15 billion) from auctioning 3g mobile licenses. Two years have passed and the same government daringly sought to reenact what they had achieved in their previous airwave auction with high hopes; however, failed miserably to their dismay. Prime Minister Manmohan Singh’s government had initially targeted to collect 400 billion rupees ($7.3billion) from the 2g airwave license auction; however, ended up raising only 94 billion rupees The government was surely over confident with its upcoming auction which turned out to be a failure on their part. But then, why did this happen? Well, those who have taken Econ 2400 should have heard of the term ‘reserve price’ alongside with the different kinds of auctions. According to the lecture, a seller who values the item at u>0 should announce a reserve price, r, to be set above r>u in order to guarantee the seller’s value on the item. However, what if the seller values too much on the item compared to the bidders value on the item? Theoretically no one will bid for the item. This is what had happened to the 2g airwave auction held by the Indian government a week ago. The starting price, or the reserve price, set on the 2g license was 140 billion rupees which is equivalent to quadruple of reserve price (35 billion rupees) set on 3g auction two years ago. And the result? Well, the government clearly failed to meet its goal.

According to the Cellular Operators Association of India, which is a body representing GSM operators, the auction outcome “indicated an artificially high reserve price that bore no congruence to market realities was the key reason for the failure.” Also, COAI argued that “the high reserve price would ensure that there would be limited players coming into the market to bid, and had also indicated that there would be extremely muted bidding with several circles that would have no bidders at all.” After all, the bidders in the auctions were operators that had been offering services before losing their licenses and were therefore “compelled to participate despite the high prices and the limited availability, simply in order to sustain their customers, businesses and to protect their years of investments.” According to the Bloomberg article below, “India may be left with as few as five operators after the latest round of spectrum auctions,” offering services to 906 million domestic users. Such reduced number of operators will naturally decrease the level of competition which could lead to possible increase in price and call rates in the near future.

In order to solve the problem, companies and analysts proposed that lowering the reserve price by setting 35 billion rupees as the starting price for 2g auction is reasonable and will encourage the bidders to bid.


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