Increased Information Provided By Simultaneous Ascending Auctions
https://priceonomics.com/the-spectrum-auction-how-economists-saved-the-day/
Of the last few weeks in this class, the topic I found most interesting was the game theory behind auction bidding. I found the logic behind the ideal strategies for various auctions to be very elegant, but I wanted to find out if they would hold up in a real life situation. This led me to my article regarding how economists “saved the day” during the spectrum auction.
The US national radio spectrum is the resource that enables us to use several of today’s necessities such as TV, radio, or smartphones. The need to regulate this resource was clear in order to ensure efficient use of the radio spectrum. The right to this resource is governed by the Federal Communications Commission (FCC) and the method they use to distribute access is through the spectrum auction. When the FCC was struggling to figure out how to figure out the logistics behind an auction as massive in scale as the spectrum auction, they decided to turn to academic experts for advice. The result led to the government selling the spectrum using a standard English auction, a type of auction we have been introduced to in class. However, what was interesting with the spectrum auction is that the value of a given license was actually dependent on the value of other licenses. This problem was called the exposure problem. An example of the exposure problem would be a company determining how much it wants to bid for a California license. In its determination, the company would want to consider how much it might have to bid in each of the other states as it would need to ensure that it does not go over its budget. This consideration differentiates the spectrum auction from auctions we have studied in class. In the auctions we mainly considered in class, it dealt with a single auction (sometimes with multiple units, but all identical). In this case, we are considering several parallel auctions with many common bidders throughout the various auctions. This complicates the problem greatly.
In order to deal with this issue, the FCC needed assistance from academics. They turned to Paul Milgrom, an academic at Stanford. This led to their idea of a simultaneous ascending auction. This type of auction would allow bidders to simultaneously see the prices of various auctions so that they can use that information to make bids in the rest of their auctions. The form of each auction itself was very similar to a standard English auction, just like the ones we studied in class. As an example of how this works, consider two companies: A and B. Let’s say Company A is only interested in obtaining a license in LA, while company B would like to get a license for LA, but it would also want a license for NYC if it can secure the LA license. Company A may bid $300,000 on LA, while Company B might bid $350,000 on both LA and NYC. Then after the first round, both companies are able to adjust their prices accordingly based on the results of the first round. This allows companies to make a holistic evaluation of what licenses they can reasonably afford.
From my understanding, the strategy for the bidder in each individual auction is the same as the ones we have studied for ascending first price auctions in class, but only when we are not considering the other simultaneous auctions. When we do consider those simultaneous auctions, we must consider the increased information the bidder gains from other auctions. As a result, it is this information that may affect the bidder’s decision and cause them to change their strategy in an auction. For instance, a bidder might bid a higher value in one auction (higher than their evaluation) if they think they have secured a really good deal for a different auction, but are only interested in obtaining both licenses (just one of the two licenses is not sufficient). This would lead to them possibly bidding higher than their true evaluation in the first auction if it means that overall, they are still getting positive returns from the combination of the two items.
The result of the auction was very successful. The FCC raked in $617 million, which is far more than they had been making in the past without the simultaneous ascending auction system. However, there were certain exploits to the auction. For example, some consolidations of companies were manipulating the system by making use of the fact that it is difficult to move from one type of license to another. However, there have been fixes put in place to the auction design to combat these exploits. Overall, the simultaneous ascending auction has been a useful method that is still in use for spectrum radio auctions as well as other simpler applications. The auction setup provides several benefits for the cases where there are multiple items being auctioned whose values are dependent on each other.