Game theorists and economists have found themselves with a starring role in the ongoing 700 MHz spectrum auction. Not only were game theorists involved in structuring the FCC auction but have been hired by every major bidder in deciding their bidding strategy. Game theory was also central to Google’s efforts to change the rules to level the playing field between incumbent telecom operators and new entrants.Licenses to operate networks on the 698-804 frequencies are being sold by the FCC in 22 MHz segments and all across the country. What makes this spectrum particularly valuable is that these frequencies can propagate through walls and obstacles well allowing for reduced construction costs. Over 100 participants from cell phone companies like Verizon and AT&T to technology companies like Google are participating in the auction.

As described by the Forbes article, games theorists like Darin Lee, an economist and principle at the consulting firm LECG, have been hired as consultants to advise companies on bidding strategy. They advise management on how risks can be minimized and where the opportunities are to capture spectrum valued by the company. The theorists sometimes construct models and simulations of the auction to come up with strategies and decision trees for optimal strategies.

The format of an auction also can affect its outcome greatly. The FCC’s spectrum auction is quite similar to an English auction with increasing bids until only one buyer remain. To prevent collusion and increase competition the FCC has implemented a blind auctioning system. This makes it more difficult for the bidders to signal to each other their intentions to depress market prices. In past auctions for example bidders were know to places bids like $5,000,617 to indicate their interest in area code 617. This is particularly important as these companies are used to settling on the same prices for services such as text messaging.

Google is a company known for hiring economists and academics to consult on strategy and the spectrum auction was no exception. By analyzing the payoffs matrix for the various companies involved they noticed the uneven payoffs for large incumbents such as Verizon with existing networks and new entrants without an existing nationwide wireless network.

One factor for the difference are the associated risks with building out the network. An established operator faces only incremental costs in utilizing the additional spectrum. New operators on the other hand need to make all the investments such as towers, offices and advertising from scratch while still without customers. Because of the increased risks for smaller entrants, they cannot justify paying the same prices for a given license.

Another incentive for incumbents to pay more is to continue the monopoly rents they enjoy on existing assets.

About the 700 MHz Auction:

http://en.wikipedia.org/wiki/700_MHz_wireless_spectrum_auction

A Game Theorist’s Perspective:

http://www.forbes.com/2006/05/30/fcc-wireless-game_cx_ck_0531games.html

http://www.forbes.com/technology/2007/12/27/spectrum-auction-wireless-tech-wire-cx_ew_1231auction.html

Google’s Perspective - Leveling the payoff matrix and the playing field :

http://googlepublicpolicy.blogspot.com/2007/07/restoring-competitive-balance-to.html

http://googlepublicpolicy.blogspot.com/search/label/Telecom