The Greatest Auction Ever: Focusing on the UK 3G auction 2000
http://www.gsmhistory.com/3g_auction/#casino
In this web page, the author describes the famous 3G radio spectrum auction happened in the UK. During this auction, each bidder engaged with unexpected passion and thus raising the price of the final bid to an unbelievable amount of £22,477,400,000. According to the author, the reason why companies were willing to pay for such an incredible price is divided in to the following reasons: for the large companies that already had other radio spectrums, the managers worried that if they did not get any 3G spectrum, their stock will fall dramatically. For a multi-billion company, 5 billion for a new spectrum is better than a probability 10% fall in stock price; for new players from outside UK, their enthusiasm was partially caused the sufficient funding they have from their backers. Both the necessity of these radio frequencies and the almost irrational excitement experienced by the managers on the scene eventually caused the dramatically high priced auction and foreshadowed the debt crisis that ends up destroyed many European telecom companies.
During the recent lectures, we learned that in an auction (of all kind), it is not a dominant strategy to bid higher than your expected benefit. That makes sense since you will lose money if you win the auction. In this auction, however, we observe a trend of companies paying price for things higher than their expected payoff (which can be proven by the fact that they lose money afterward.) This phenomenon is not explained by the winner’s curse because, according to many of the managers, they had a relatively accurate expected bidding price at first, but they just kept going after the price had passed the point by convincing their boss and themselves that there is extra profit from winning such contract. This seems counterintuitive, but it is what actually happened. From this event, we can tell that auctions in real life are not as simple as we learned in class. Although most of the bidders’ action is the same as what being predicted by game theory, we should always look for reasons beyond the game itself such as irrational bidding and gambling if the actual result differs from the prediction of a classical game.