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Auctioning off Airwaves

https://www.nytimes.com/reuters/2018/10/03/business/03reuters-italy-auction-5g.html

The chosen article discusses the Italian government’s most recent sale of high-speed airwaves for $7.6 billion. This price is more than double the 2.5 million euros anticipated as the minimum target for the airwaves. This sale occurred after a two-week bidding war between companies who wanted the ability to offer 5G services (for faster download speeds, enhanced coverage, and the development of several high-tech devices). The strategic advantage ultimately goes to Telecom Italia and Vodafone in the long-term; however, the price these waves sold for is a record-high. This auction was a major success for the Italian government, which was struggling to pay for welfare programs, while paying its own national debt. This being said, the nature of the fierce competition and the auction rules raises questions of sustainability. Though the winners like Telecom Italia have gained an asset, this bidding war has put them in far more debt than their current 25 million Euros, as well as caused stock prices to fall as investors worry about the over-spending and an industry already marked with worsening competition. This is especially the case since turning a profit on these spectra is seen to be a challenge. Along the lines of having misgivings about this auction system, many of Italy’s large phone companies were warned or even threatened to boycott it saying the bidding rules were too rigid and punitive and the starting price too high.

In relating this article to the auction section of our class, the type of bidding war used by the national governments regarding airwaves is a form of an ascending auction. For example, the FCC of the United States uses an online-bidding system in which there are several rounds and the results of each round are announced to the bidders before the start of the next. As we learned in class, in an ascending auction, the dominant strategy is to stay in the auction until your value is reached. This aids efficiency, in theory, because it circumvents the possibility of bidding up the price of the airwave beyond its actual value or to stop the bidding war too soon in order to avoid overpaying. Then how come the Italian government ended up receiving twice their projected price for the 5G airwaves? It seems that the telecommunications companies may have overvalued the 5G waves or did not follow the dominant strategy of an ascending bid auction. It appears that the fierce competition in the telecommunications industry is largely to blame for driving up the airwave prices and leading Telecom Italia to take a big gamble. The 5G network does have multiple uses beyond download speeds that have become coveted in the era of innovation – for example, driverless cars. However, if these propositions experience problems themselves, then the auction winners are in trouble. This is especially the case because, once the auction is paid for, the industry will be hard-pressed for money to pay for the infrastructure to implement said technology (ex. radio systems and antennas). Thus, the telecomm industry should have done a better job of estimating their individual value for the airwave and then sticking to their dominant strategy of remaining in the auction until their value was reached.

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