- Email: [email protected]
Lessons from the Nigerian GSM auction
Telecommunications Policy 27 (2003) 407–416
Lessons from the Nigerian GSM auction Darin Lee* LECG, LLC, 350 Massachusetts Avenue Suite 300, Cambridge, MA 02139, USA
Abstract The recent Nigerian GSM auction was the first spectrum auction to use a variation of the ‘‘AngloDutch’’ auction format, which combines elements of the ascending and sealed bid formats. For the Nigerian Communication Commission (NCC), this auction represented a watershed event, as it was the first time the NCC had used an auction to allocate radio spectrum. In this paper, we relate a number of last minute changes in the auction rules and discuss them in the context of the stated objectives of the NCC. Moreover, we show how the experience of the Nigerian GSM auction can provide valuable insight to telecommunications policy makers into some of the challenges facing auction designers and administrators. r 2003 Elsevier Science Ltd. All rights reserved. Keywords: Spectrum Auctions; Nigeria; GSM; Anglo-Dutch; Policy
1. Introduction Of the recent spectrum auctions worldwide, those for third-generation (3G) spectrum throughout Europe during 2000 have received the most attention. Recent papers analyzing various aspects of the European 3G auctions include Klemperer (2002a,b), Crampton (2002) and Jehiel and Moldovanu (2001). Indeed, the enormous sums of money paid by bidders in the UK and Germany not only motivated many other governments worldwide to allocate their 3G spectrum via auction, but may also be to blame—at least in part—for the current dismal financial state of many international wireless telecommunications firms.1 Although the European 3G auctions have been the primary focus of attention for policy makers, academics and industry analysts, one of the most novel recent spectrum auctions—for three second—generation (GSM) licenses in Nigeria—went largely unnoticed. Nevertheless, the Nigerian GSM auction should be of particular interest to policy makers and telecommunications regulatory bodies, as it represented *Tel.: +1-617-761-0108; fax: +1-617-621-8018. E-mail address: darin [email protected] (D. Lee). 1 See, for example, ‘‘Wireless Web Woes: Telecom Players Have Spent Billions, but Profits are Still Far Off,’’ Business Week Online, June 4, 2001 or ‘‘3G Operators Desperate For Help,’’ 3G Newsroom. com, May 18, 2001. 0308-5961/03/$ - see front matter r 2003 Elsevier Science Ltd. All rights reserved. doi:10.1016/S0308-5961(03)00005-3
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the first time that a variation of the so-called ‘‘Anglo-Dutch’’ auction format—which combines elements of ascending and sealed—bid formats—had been used to auction radio spectrum.2 Moreover, the Nigerian GSM auction was characterized by an unusual number of important rule changes in the days leading up to the auction, and thus serves as a valuable example of how regulatory authorities need to be prepared to change their auction rules—possibly at the last moment—to accommodate the concerns of bidders. Finally, by most accounts, the Nigerian auction was deemed a complete success based on the revenue it generated and its smooth execution. However, based on the auction rules, the outcome could have been much different. This suggests another important lesson can be drawn from the Nigerian auction. In particular, evaluating an auction mechanism based on a single outcome could lead to unpleasant surprises for regulators adopting the same mechanism in the future without examining its general incentive properties. This article discusses some of the novel aspects of the Nigerian GSM auction. Moreover, the article explores how the concerns of bidders resulted in several last-minute rule changes, and in turn, considers what lessons can be drawn by policy makers from the auction and its design.
2. Spectrum auction formats In 1990, New Zealand became the first country to use auctions to allocate radio-spectrum. New Zealand’s regulatory authorities chose to use the second-price sealed bid format, whereby licenses were awarded to the highest bidders, who in turn were required to pay the second highest bid.3 Although economic theory suggests that this type of auction provides the proper incentives for bidders to bid ‘‘truthfully,’’ some outcomes from New Zealand demonstrated that second-price sealed bid auctions can lead to politically embarrassing results. In one auction, for example, the two highest bids were NZ$100,000 and NZ$6, thus, the winner paid NZ$6 even though it would have been willing to pay NZ$100,000 (McMillan, 1994, p. 194). Although a first price sealed bid auction—in which winning bidders are required to pay their bid—would avoid these types of embarrassing outcomes, they tend to have less desirable efficiency properties in practice. Since bidders in a second price sealed bid auction have a dominant strategy—which is to bid their valuation—even the most unsophisticated bidders can usually figure out the bid which maximizes their expected return from the auction. In a first price sealed bid auction however, bidders often find themselves guessing what are the likely valuations of others, and their bids—in practice— often depend on what they think other bidders will bid. Thus, there is less certainty, in practice, that first price sealed bid auctions allocate licenses to those bidders who value them the most. Consequently, regulators, which tend to place economic efficiency high on their list of policy objectives when selecting between auction formats, have tended not to use first price sealed bid auctions to allocate radio-spectrum. 2 Moreover, it was the first time that the ‘‘clock auction’’ format (one in which the price ‘‘ticks’’ up and bidders merely choose to accept or reject the price) of bidding has been used to auction spectrum. 3 For simplicity, the discussion in this section assumes a single unit auction. For a discussion of multiple unit, sealed bid auctions (both discriminative and uniform price), the reader is referred to Ausubel and Cramton (2002) and Kagel and Levin (2000).
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Virtually all recent spectrum auctions, including all of the European 3G auctions conducted in 2000, have been based on variations of the ascending auction format.4 Ascending auctions are multiple round auctions in which prices continue to rise until supply equals demand. Ascending formats have been widely adopted since the allocations which they generate tend to be highly efficient. That is, ascending auctions have the desirable property that they usually allocate scarce spectrum resources to those firms who value them the most, and therefore, will make the best economic use of them. Since ascending auctions give bidders the opportunity to top their rivals’ bids, any bidder who fails to win a license in an ascending auction does so because they refuse to pay the asking price. Ascending auction formats also have the property that they reveal a great deal of information during the bidding process, and thus, tend to reduce the winner’s curse (Cramton, 1998; McMillan, 1995). Although most recent spectrum auctions have tended to favor variations of the ascending auction format, disappointing results in some of the later 3G auctions (Italy, the Netherlands, and Austria, for example) have prompted some auction designers to explore alternative formats.5 2.1. The Anglo-Dutch format One alternative auction format is the so-called ‘‘Anglo-Dutch format,’’ first suggested by Klemperer (1998), and further elaborated in Klemperer (2002b). An Anglo-Dutch auction for N identical licenses starts with a traditional ascending auction, which continues until N+i bidders remain (Klemperer, 1998 suggests setting i=1). The N+i bidders then participate in a sealed bid phase with the minimum bid equal to the price from the final round of the ascending phase. The auctioneer can choose between a discriminatory or a uniform final price, using the lowest winning price from the sealed bid stage in the latter case. It has been suggested that the Anglo-Dutch format retains virtually all of the benefits of both the ascending and sealed bid auction formats while mitigating most of their shortcomings. In particular, Klemperer (2002b) argues that most of the efficiency and information revelation properties of the ascending auction are retained (through the use of the first phase), while the presence of a final sealed bid phase encourages entry and discourages collusive behavior.
3. The Nigerian GSM auction The Nigerian GSM auction took place between January 17–19, 2001, in Abuja, Nigeria. Three second generation digital mobile licenses (DMLs) were auctioned simultaneously using a variation of the Anglo-Dutch format. Each of the three licenses were identical ex ante.6 All five bid teams (consisting of up to 5 team members) were required to bid from a secure hotel room, and great 4
These auctions are often referred to as ‘‘simultaneous multiple round ascending auctions.’’ For brevity, we will adopt the term ‘‘ascending auction’’ to refer to auctions of this type. For an excellent overview of spectrum auction formats, the reader is referred to Crampton (2002). 5 Whereas 3G auctions in the UK and Germany raised 129 and 103 Euros per pop, respectively, the Dutch, Austrian and Italian 3G auctions only raised 34, 18 and 42 Euros per pop, respectively. See Jehiel and Moldovanu (2001) for details. 6 The precise location of spectrum was to be determined randomly after the auction was completed.
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care was taken to ensure that bid teams could not communicate with one another, or with the outside world, during the auction day. 3.1. The auction rules The auction rules which bidders based their initial preparations on were published by the Nigerian Communications Commission (NCC) on December 8, 2000 in their Information Memorandum. The auction was divided into two phases: an ascending phase and a sealed bid phase. If, based on the pre-qualification requirements, there were only four qualified bidders, the auction was to start directly in the sealed bid phase. So long as there were more than four qualified bidders at the outset however, the auction was to start in the ascending bid phase; if three or fewer bidders pre-qualified, there would be no auction. As it turned out, five bidders pre-qualified, and hence, the auction started with the ascending bid phase. The five bidders were Communications Investment Limited (CIL), Econet Wireless, Mobile Telecommunications Network Nigeria Limited (MTN), MSI Cellular and United Networks.7 3.1.1. The ascending bid phase The ascending phase of the Nigerian GSM auction was somewhat novel in that an ascending clock format was chosen.8 In a traditional ascending auction, bidders chose their own bid amounts, subject to certain restrictions. These restrictions may include minimum or maximum bid amounts, ‘‘activity’’ rules, or restrictions which prevent bidders from topping their own bid if it is currently the highest bid on a particular license. More recently, some spectrum auctions (such as those in Canada and some in the US) have adopted ‘‘check box’’ bidding, which restricts bidders to choose the level of their bid increment from a list of finite choices. In an ascending clock auction, the auctioneer announces a common price for all bidders, and the bidders elect whether or not they are willing to accept that price. Thus, a discrete clock auction is simply the special case of check box bidding in which there is only a single increment. In the Nigerian GSM auction, the Auction Control Team (ACT) announced a new (higher) price each round—the announced price— and bidders were required to submit one of three possible responses. The possible responses were ‘‘Yes’’, which indicated that the bidder was willing to pay that price, ‘‘No’’, which indicated that the bidder was not willing to pay that price, or ‘‘Waive’’, which indicated that the bidder was not willing to reveal whether or not it was willing to pay that price. Once a bidder bid ‘‘No’’, it was no longer permitted to bid in subsequent rounds of the ascending bid phase of the auction. Each bidder was permitted to use a maximum of three waivers and the initial reservation price for each of the licenses was US $100 million. The use of waivers is fairly common in spectrum auctions. Typically, their purpose is to allow bidders a little more time in making decisions (allowing them, for example, to confer with investors as license prices rise). While communication with the outside world was not permitted 7
There were rumors that only three of the five bidders had ‘‘passed’’ the pre-qualification screening, but there was significant political pressure on the NCC to allow all five bidders to participate to ensure an ascending bid phase. 8 Although clock auctions have been used to allocate various types of commodities (flowers, treasury bills, etc.), to our knowledge, the Nigerian auction was the first spectrum auction ever to use an ascending clock format. The recent electricity auction for Basic Generation Services in New Jersey implemented a simultaneous descending clock mechanism. See Loxley and Salant (2002) for details.
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during the bidding day in the Nigerian auction, the intent of the waivers—according to the auction’s designers was ‘‘to allow bidders additional time to discuss its bid response.’’ (Doyle & McShane, 2003, p. 21) As we will discuss later however, waivers played a key strategic role in this auction since they could also be used to potentially reduce the final price paid for a license. Bidders that submitted responses of ‘‘Yes’’ or ‘‘Waive’’ were considered to be active at the end of an ascending bid round; bidders that submitted a response of ‘‘No’’ were deemed inactive. The response of each bidder was made public to all of the bidders at the completion of each round. The ascending bid phase continued so long as there were four or more active bidders at the end of a round, and the announced price would rise by no more than 10% each round.9 It is interesting to note that the auction’s designer opted not to follow the suggestion of Klemperer (1998) that the ascending bid phase should end when there were N+1 (i.e., four) active bidders. This was most likely due to the fact that the number of serious bidders in the Nigerian auction was not expected to be more than four or five. Moreover, while the auction designers’ primary concern was conducting a transparent and efficient allocation process, there was an underlying sense among those involved in the auction that some government officials wanted to assure a significant ascending bid phase. If a round of bidding ended with exactly three active bidders, those three bidders were deemed ‘‘successful’’ bidders, and the auction ended with each bidder paying the announced price in the last round in which all successful bidders each responded ‘‘Yes’’. Note that since a bidder responding ‘‘Waive’’ was considered active at the end of a round, this need not be the last announced price. If an ascending bid round ended with strictly fewer than three active bidders, the auction proceeded to the sealed bid phase. 3.1.2. The sealed bid phase If an ascending bid round ended with two or fewer active bidders, the auction entered the sealed bid phase and bidders were divided into three subsets. All bidders who bid ‘‘Yes’’ in the final round proceeded directly to the grant stage of the auction (i.e., a license was reserved for them—at a price to be determined—and they were excluded from bidding in the sealed bid phase). Note that by definition, there could be at most two of these bidders. Bidders who bid ‘‘Waive’’ or ‘‘No’’ in the final round of the ascending bid phase were permitted to bid in the sealed bid phase, and competed for the remaining licenses. Bidders who had bid ‘‘No’’ in a round prior to the final round were not eligible to bid in the sealed bid phase and could not win a license. Each eligible bidder in the sealed bid phase was required to submit a final bid of at least that amount which it last bid ‘‘Yes’’ to in the ascending phase, and at most, the final announced price from the ascending phase. Although the minimum and maximum bid amounts were not to be made public, each bid team could figure this out by keeping track of the publicly announced results during the ascending bid phase. To determine the winners and final price, sealed bids were ordered from highest to lowest and the final license price was defined as the lowest successful sealed bid amount. For example, if there 9
Furthermore, the announced price was not permitted to rise by more than 50% over the final announced price from the previous day. Since bid teams were not permitted to communicate with the outside world during the bid day, this upper bound was implemented so that bidders would know before the beginning of each auction day the maximum they could conceivably be asked to pay before being allowed to confer with management or investors.
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were two licenses available in the sealed bid phase, the final price would be the second highest sealed bid. Each successful bidder, including those bidders who proceeded directly to the grant stage, was to pay the same final price. In the event of a tie during the sealed bid phase, successful bidders were to be determined by the toss of a coin.
4. Lessons from the Nigerian GSM auction The Nigerian GSM auction rules were designed with two normative goals in mind: (1) no successful bidder should have to pay more than it explicitly said it was willing to (either by bidding ‘‘Yes’’ in the ascending-bid phase or through a sealed bid), and (2) all successful bidders should pay the same price for a license. Although the original rules (as described in the December 8th Information Memorandum) reflected these normative goals, it soon became clear that these policy objectives depended crucially on one aspect of the auction design which made bidders extremely uncomfortable: the use of the coin toss as a tie-breaking mechanism. From the standpoint of allocative efficiency, the coin toss was not problematic, since it would only be used in situations where bidders effectively had the same valuation (i.e., when two or more bidders bid the exact same amount in the sealed bid phase). Nevertheless, the possibility of not being allocated a license based on the outcome of a coin toss was extremely unsettling for a number of bidders, and thus the NCC needed to quickly revise its rules to accommodate these concerns. Indeed, some bidders were of the belief that not being allocated a license on the basis of losing a coin toss would have been the worst imaginable outcome, one which could not be justified, after the fact, to senior management, board members, and shareholders. Consequently, four days before the auction was scheduled to begin, the NCC modified the auction rules such that in the sealed-bid phase, there would no longer be a maximum bid amount. Moreover, in the event of a tie, the tied bidders would re-bid, with the new minimum bid being set at the tied bid amount, thus eliminating the need to use a coin toss. Unfortunately however, these seemingly innocuous rule changes put into potential conflict the two normative goals of the auction. By eliminating the maximum bid during the sealed-bid phase, it was now possible that the price to be paid by all three winning bidders exceeded the last announced price to which grant-stage bidders said ‘‘Yes’’—and hence could be expected to pay. This was in direct conflict with the first policy objective—that no successful bidder should have to pay more than it explicitly said it was willing to. In order to resolve this conflict, different prices could be used (i.e., winning bidders from the sealed-bid phase could be required to pay more than grant-stage bidders if necessary), but this would have violated the second policy objective of the auction—that all bidders pay the same final price. In the end, the NCC opted to relax its second policy objective by requiring sealed bidders to pay their bid amount, a rule which was imposed less than 12 hours before the auction began. 4.1. Evaluating an auction mechanism based on a single outcome may lead to undesirable results in the future By virtually all accounts, the Nigerian GSM auction was deemed a complete success (Doyle & McShane, 2003, Section 7). In light of the widespread praise this auction received, other
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government agencies—both in Nigeria and elsewhere—may feel comfortable adopting the same auction format for allocating resources in the future. While the auction exceeded revenue expectations and was extremely well-administered, regulators should be cautious of judging any complex mechanism based on a single outcome. Indeed, the Nigerian GSM auction serves as an excellent example of why regulators need to pay close attention to a mechanism’s general incentive properties—and their possible implications—before deeming the mechanism a complete success. While the revenues raised by the Nigerian auction exceeded virtually everyone’s expectations, the auction result could have been much different. The possibility for a disappointing outcome arises from the rule which determines the final price when the ascending bid phase ends with exactly three active bidders. In this case, the final price paid by the three successful bidders was defined as the announced price in the last round in which all three successful bidders each responded ‘‘Yes’’. Since a bid of ‘‘Waive’’ maintained a bidder’s status as an active bidder, there was a strong incentive to use waivers even when the announced price was less than a bidder’s bid ceiling.10 This strategic incentive to use waivers was balanced by the desire to preserve them for situations in which they were needed for non-strategic reasons, such as requiring additional time to make a decision. Although in many endgame scenarios, the rule for determining the final price produces the ‘‘correct’’ price, it is not hard to conceive of examples in which the Nigerian Government could have received significantly less revenue than they were entitled to because of this detail in the rules. Consider the example described in Table 1. In this example, the auction ends in round 8 since the number of active bidders falls from four to three. It would not be unreasonable to expect the three successful bidders (A, B and C) to each pay $160 million, since all three of these bidders said ‘‘Yes’’ to an announced price of at least this much. According to the auction rules however, each of the winning bidders would only be required to pay the first round price of $100 million, since this is the only price at which they all simultaneously responded ‘‘Yes’’. An alternative rule which would eliminate this possibility would be to require each successful bidder to pay the last announced price at which all three successful bidders said ‘‘Yes’’ to that price or a price higher than it. In the example above, this would have increased the Nigerian Government’s auction revenue by 60%. In the actual auction, this detail in the rules did not impact that amount of revenues generated. Nevertheless, future auctions adopting a similar design would likely benefit from making this slight—albeit important—rule modification.11 4.2. The auction results The auction proper lasted three full days. On Day One, every bidder bid ‘‘Yes’’ to each of the six announced prices and therefore, prices at the end of Day One had reached $150 million. On Day Two, one waiver was used in round 2 by United, which subsequently bid ‘‘Yes’’ in the 10
The fact that waivers played a strategic role in the auction was well-understood by the auction’s designers. For example, Doyle and McShane (2003) suggest that the ‘‘optimal strategy’’ was for a bidder to play a sequence of three waivers before saying no to an announced price above its valuation. 11 While it is not known why the auction designers chose their particular price determination rule, it is possible that they believed there was a fairly straightforward strategy which all bidders would adopt—and that this strategy did not involve using waivers in the manner described in Table 1. This interpretation would be consistent with Doyle and McShane (2003) which suggest that most of the bidders bid irrationally during the auction.
D. Lee / Telecommunications Policy 27 (2003) 407–416
414 Table 1 Round
1 2 3 4 5 6 7 8
Announced price ($ millions)
100 110 120 130 140 150 160 170
Bidder action
Active bidders
A
B
C
D
E
Yes Waive Yes Yes Waive Yes Yes Waive
Yes Yes Waive Yes Yes Waive Yes Yes
Yes Yes Yes Waive Yes Yes Waive Yes
Yes Yes Yes Yes Waive Waive Waive No
Yes Yes Waive Waive Waive No
5 5 5 5 5 4 4 3
remaining four rounds that day. By the end of Day Two, many of the bidders were clearly beginning to express some anxiety over the fact that all bidders except United had failed to show any sign of weakness. Finally, on Day Three, MSI, which was generally considered to be one of the experienced bidders, used three successive waivers starting in round 2. In round 3, both MSI and United used waivers, thus, both bidders had used two of their three available waivers. In round 4, MSI used its third and last waiver, and MTN used its first waiver. Somewhat surprisingly, United chose to bid ‘‘No’’, despite the fact that it still had one unused waiver. In round 5, Econet used its first waiver, MTN used its second waiver, and MSI bid ‘‘No’’. Since round 5 ended with exactly three active bidders, the auction ended without the need to proceed to the sealed bid phase, and all winning bidders were granted provisional licenses at the price of $285 million, the announced price from round 3 of that day. Table 2 summarizes the auction results, round by round.
5. Conclusions The Nigerian GSM auction, by virtually all reports, was considered to be a success. The final license price of $285 million per license was substantially more than the government had expected to raise. Indeed, given the somewhat disappointing results (from the point of view of the governments involved), of the previous few 3G auctions in Europe, the Nigerian GSM auction surpassed virtually everyone’s revenue expectations and, based on ‘‘addressable’’ users, raised more revenue per capita than the 3G auctions in the Netherlands and Italy.12 Although the Nigerian GSM auction was perceived to be a complete success based on the revenues it raised, the outcome could have been much different, and many important lessons can 12
Based on 10 million potential Nigerian users, the Nigerian GSM auction raised roughly 95 Euros per capita, compared to 34 Euros per capita in the Netherlands and 42 Euros per capita in Italy. Moreover, if one were also to adjust for differences in income, the Nigerian auction raised more per capita than any other spectrum auction to date. It should be noted, however, that Nigeria has one of the lowest teledensities in the world, at 0.4 mainlines per 100 people, and the highest revenue per mainline, at $3738 per year. Source: World Telecommunication Development Report 2000, International Telecommunication Union.
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Table 2 The auction results Day
Round
Announced price ($ millions)
Bidder action CIL
Econet
MSI
Active bidders MT
United
1 1 1 1 1 1
1 2 3 4 5 6
100 110 121 130 140 150
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
5 5 5 5 5 5
2 2 2 2 2 2
1 2 3 4 5 6
165 178 190 200 212 225
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Waive Yes Yes Yes Yes
5 5 5 5 5 5
3 3 3 3 3
1 2 3 4 5
248 265 285 295 300
Yes Yes Yes Yes Yes
Yes Yes Yes Yes Waive
Yes Waive Waive Waive No
Yes Yes Yes Waive Waive
Yes Yes Waive No
5 5 5 4 3
be drawn from observing how its rules evolved. The experience of the Nigerian GSM auction provides valuable insight into some of the challenges facing regulatory agencies tasked with administering spectrum auctions. Bidders often have concerns which may be overlooked by auction designers, since they are unlikely to occur in equilibrium, or fail to have negative implications on issues which auction designers are typically the most concerned with, such as economic efficiency. Moreover, the auction serves as an excellent example of why an allocation mechanism such as an auction needs to be evaluated by more than a single outcome if it is to be used for subsequent resource allocations in the future. Thus, the experience of the Nigerian GSM auction should be of interest to regulatory agencies considering the use of spectrum auctions since it demonstrates how the concerns of bidders may influence an auction’s final design and that despite their careful design, potentially costly oversights in auction rules can still remain.
Acknowledgements The author thanks Oscar Volij and an anonymous refree for helpful comments.
References Ausubel, L., & Cramton, P. (2002). Demand reduction and inefficiency in multi-unit auctions. College Park, Maryland: University of Maryland Discussion Paper.
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Cramton, P. (1998). Ascending auctions. European Economic Review, 42, 745–756. Crampton, P. (2002). Spectrum auctions. In S. M. Martin Cave, & I. Vogelsang (Eds.), Handbook of telecommunications economics (pp. 605–639). Amsterdam: Elsevier Science, B.V (Chapter 14). Doyle, C., & McShane, P. (2003). On the design and implementation of the GSM auction in Nigeria—the world’s first ascending clock spectrum auction. Telecommunications Policy (27) this issue. Jehiel, P., & Moldovanu, B. (2001). The European UMTS/IMT-2000 License Auctions. Discussion Paper, University of Mannheim. Kagel, J., & Levin, D. (2000). Multi-Unit Demand Auctions with Synergies: Behavior in Sealed-Bid versus Ascending-Bid Uniform Price Auctions. Ohio State University Discussion Paper, Columbus, Ohio. Klemperer, P. (1998). Auctions with almost common values: The ‘‘Wallet Game’’ and its applications. European Economic Review, 42, 757–769. Klemperer, P. (2002aa). How (not) to run auctions: The European 3G telecom auctions. European Economic Review, 46, 829–845. Klemperer, P. (2002bb). What really matters in auction design. Journal of Economic Perspectives, 16, 169–190. Loxley, C., & Salant, D. (2002). Default Services Auction. NERA Working paper, San Francisco, June 2002. McMillan, J. (1994). Selling spectrum rights. Journal of Economic Perspectives, 8, 145–162. McMillan, J. (1995). Why auction the spectrum. Telecommunications Policy, 19, 191–199.
Lessons from the Nigerian GSM auction Darin Lee* LECG, LLC, 350 Massachusetts Avenue Suite 300, Cambridge, MA 02139, USA
Abstract The recent Nigerian GSM auction was the first spectrum auction to use a variation of the ‘‘AngloDutch’’ auction format, which combines elements of the ascending and sealed bid formats. For the Nigerian Communication Commission (NCC), this auction represented a watershed event, as it was the first time the NCC had used an auction to allocate radio spectrum. In this paper, we relate a number of last minute changes in the auction rules and discuss them in the context of the stated objectives of the NCC. Moreover, we show how the experience of the Nigerian GSM auction can provide valuable insight to telecommunications policy makers into some of the challenges facing auction designers and administrators. r 2003 Elsevier Science Ltd. All rights reserved. Keywords: Spectrum Auctions; Nigeria; GSM; Anglo-Dutch; Policy
1. Introduction Of the recent spectrum auctions worldwide, those for third-generation (3G) spectrum throughout Europe during 2000 have received the most attention. Recent papers analyzing various aspects of the European 3G auctions include Klemperer (2002a,b), Crampton (2002) and Jehiel and Moldovanu (2001). Indeed, the enormous sums of money paid by bidders in the UK and Germany not only motivated many other governments worldwide to allocate their 3G spectrum via auction, but may also be to blame—at least in part—for the current dismal financial state of many international wireless telecommunications firms.1 Although the European 3G auctions have been the primary focus of attention for policy makers, academics and industry analysts, one of the most novel recent spectrum auctions—for three second—generation (GSM) licenses in Nigeria—went largely unnoticed. Nevertheless, the Nigerian GSM auction should be of particular interest to policy makers and telecommunications regulatory bodies, as it represented *Tel.: +1-617-761-0108; fax: +1-617-621-8018. E-mail address: darin [email protected] (D. Lee). 1 See, for example, ‘‘Wireless Web Woes: Telecom Players Have Spent Billions, but Profits are Still Far Off,’’ Business Week Online, June 4, 2001 or ‘‘3G Operators Desperate For Help,’’ 3G Newsroom. com, May 18, 2001. 0308-5961/03/$ - see front matter r 2003 Elsevier Science Ltd. All rights reserved. doi:10.1016/S0308-5961(03)00005-3
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the first time that a variation of the so-called ‘‘Anglo-Dutch’’ auction format—which combines elements of ascending and sealed—bid formats—had been used to auction radio spectrum.2 Moreover, the Nigerian GSM auction was characterized by an unusual number of important rule changes in the days leading up to the auction, and thus serves as a valuable example of how regulatory authorities need to be prepared to change their auction rules—possibly at the last moment—to accommodate the concerns of bidders. Finally, by most accounts, the Nigerian auction was deemed a complete success based on the revenue it generated and its smooth execution. However, based on the auction rules, the outcome could have been much different. This suggests another important lesson can be drawn from the Nigerian auction. In particular, evaluating an auction mechanism based on a single outcome could lead to unpleasant surprises for regulators adopting the same mechanism in the future without examining its general incentive properties. This article discusses some of the novel aspects of the Nigerian GSM auction. Moreover, the article explores how the concerns of bidders resulted in several last-minute rule changes, and in turn, considers what lessons can be drawn by policy makers from the auction and its design.
2. Spectrum auction formats In 1990, New Zealand became the first country to use auctions to allocate radio-spectrum. New Zealand’s regulatory authorities chose to use the second-price sealed bid format, whereby licenses were awarded to the highest bidders, who in turn were required to pay the second highest bid.3 Although economic theory suggests that this type of auction provides the proper incentives for bidders to bid ‘‘truthfully,’’ some outcomes from New Zealand demonstrated that second-price sealed bid auctions can lead to politically embarrassing results. In one auction, for example, the two highest bids were NZ$100,000 and NZ$6, thus, the winner paid NZ$6 even though it would have been willing to pay NZ$100,000 (McMillan, 1994, p. 194). Although a first price sealed bid auction—in which winning bidders are required to pay their bid—would avoid these types of embarrassing outcomes, they tend to have less desirable efficiency properties in practice. Since bidders in a second price sealed bid auction have a dominant strategy—which is to bid their valuation—even the most unsophisticated bidders can usually figure out the bid which maximizes their expected return from the auction. In a first price sealed bid auction however, bidders often find themselves guessing what are the likely valuations of others, and their bids—in practice— often depend on what they think other bidders will bid. Thus, there is less certainty, in practice, that first price sealed bid auctions allocate licenses to those bidders who value them the most. Consequently, regulators, which tend to place economic efficiency high on their list of policy objectives when selecting between auction formats, have tended not to use first price sealed bid auctions to allocate radio-spectrum. 2 Moreover, it was the first time that the ‘‘clock auction’’ format (one in which the price ‘‘ticks’’ up and bidders merely choose to accept or reject the price) of bidding has been used to auction spectrum. 3 For simplicity, the discussion in this section assumes a single unit auction. For a discussion of multiple unit, sealed bid auctions (both discriminative and uniform price), the reader is referred to Ausubel and Cramton (2002) and Kagel and Levin (2000).
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Virtually all recent spectrum auctions, including all of the European 3G auctions conducted in 2000, have been based on variations of the ascending auction format.4 Ascending auctions are multiple round auctions in which prices continue to rise until supply equals demand. Ascending formats have been widely adopted since the allocations which they generate tend to be highly efficient. That is, ascending auctions have the desirable property that they usually allocate scarce spectrum resources to those firms who value them the most, and therefore, will make the best economic use of them. Since ascending auctions give bidders the opportunity to top their rivals’ bids, any bidder who fails to win a license in an ascending auction does so because they refuse to pay the asking price. Ascending auction formats also have the property that they reveal a great deal of information during the bidding process, and thus, tend to reduce the winner’s curse (Cramton, 1998; McMillan, 1995). Although most recent spectrum auctions have tended to favor variations of the ascending auction format, disappointing results in some of the later 3G auctions (Italy, the Netherlands, and Austria, for example) have prompted some auction designers to explore alternative formats.5 2.1. The Anglo-Dutch format One alternative auction format is the so-called ‘‘Anglo-Dutch format,’’ first suggested by Klemperer (1998), and further elaborated in Klemperer (2002b). An Anglo-Dutch auction for N identical licenses starts with a traditional ascending auction, which continues until N+i bidders remain (Klemperer, 1998 suggests setting i=1). The N+i bidders then participate in a sealed bid phase with the minimum bid equal to the price from the final round of the ascending phase. The auctioneer can choose between a discriminatory or a uniform final price, using the lowest winning price from the sealed bid stage in the latter case. It has been suggested that the Anglo-Dutch format retains virtually all of the benefits of both the ascending and sealed bid auction formats while mitigating most of their shortcomings. In particular, Klemperer (2002b) argues that most of the efficiency and information revelation properties of the ascending auction are retained (through the use of the first phase), while the presence of a final sealed bid phase encourages entry and discourages collusive behavior.
3. The Nigerian GSM auction The Nigerian GSM auction took place between January 17–19, 2001, in Abuja, Nigeria. Three second generation digital mobile licenses (DMLs) were auctioned simultaneously using a variation of the Anglo-Dutch format. Each of the three licenses were identical ex ante.6 All five bid teams (consisting of up to 5 team members) were required to bid from a secure hotel room, and great 4
These auctions are often referred to as ‘‘simultaneous multiple round ascending auctions.’’ For brevity, we will adopt the term ‘‘ascending auction’’ to refer to auctions of this type. For an excellent overview of spectrum auction formats, the reader is referred to Crampton (2002). 5 Whereas 3G auctions in the UK and Germany raised 129 and 103 Euros per pop, respectively, the Dutch, Austrian and Italian 3G auctions only raised 34, 18 and 42 Euros per pop, respectively. See Jehiel and Moldovanu (2001) for details. 6 The precise location of spectrum was to be determined randomly after the auction was completed.
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care was taken to ensure that bid teams could not communicate with one another, or with the outside world, during the auction day. 3.1. The auction rules The auction rules which bidders based their initial preparations on were published by the Nigerian Communications Commission (NCC) on December 8, 2000 in their Information Memorandum. The auction was divided into two phases: an ascending phase and a sealed bid phase. If, based on the pre-qualification requirements, there were only four qualified bidders, the auction was to start directly in the sealed bid phase. So long as there were more than four qualified bidders at the outset however, the auction was to start in the ascending bid phase; if three or fewer bidders pre-qualified, there would be no auction. As it turned out, five bidders pre-qualified, and hence, the auction started with the ascending bid phase. The five bidders were Communications Investment Limited (CIL), Econet Wireless, Mobile Telecommunications Network Nigeria Limited (MTN), MSI Cellular and United Networks.7 3.1.1. The ascending bid phase The ascending phase of the Nigerian GSM auction was somewhat novel in that an ascending clock format was chosen.8 In a traditional ascending auction, bidders chose their own bid amounts, subject to certain restrictions. These restrictions may include minimum or maximum bid amounts, ‘‘activity’’ rules, or restrictions which prevent bidders from topping their own bid if it is currently the highest bid on a particular license. More recently, some spectrum auctions (such as those in Canada and some in the US) have adopted ‘‘check box’’ bidding, which restricts bidders to choose the level of their bid increment from a list of finite choices. In an ascending clock auction, the auctioneer announces a common price for all bidders, and the bidders elect whether or not they are willing to accept that price. Thus, a discrete clock auction is simply the special case of check box bidding in which there is only a single increment. In the Nigerian GSM auction, the Auction Control Team (ACT) announced a new (higher) price each round—the announced price— and bidders were required to submit one of three possible responses. The possible responses were ‘‘Yes’’, which indicated that the bidder was willing to pay that price, ‘‘No’’, which indicated that the bidder was not willing to pay that price, or ‘‘Waive’’, which indicated that the bidder was not willing to reveal whether or not it was willing to pay that price. Once a bidder bid ‘‘No’’, it was no longer permitted to bid in subsequent rounds of the ascending bid phase of the auction. Each bidder was permitted to use a maximum of three waivers and the initial reservation price for each of the licenses was US $100 million. The use of waivers is fairly common in spectrum auctions. Typically, their purpose is to allow bidders a little more time in making decisions (allowing them, for example, to confer with investors as license prices rise). While communication with the outside world was not permitted 7
There were rumors that only three of the five bidders had ‘‘passed’’ the pre-qualification screening, but there was significant political pressure on the NCC to allow all five bidders to participate to ensure an ascending bid phase. 8 Although clock auctions have been used to allocate various types of commodities (flowers, treasury bills, etc.), to our knowledge, the Nigerian auction was the first spectrum auction ever to use an ascending clock format. The recent electricity auction for Basic Generation Services in New Jersey implemented a simultaneous descending clock mechanism. See Loxley and Salant (2002) for details.
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during the bidding day in the Nigerian auction, the intent of the waivers—according to the auction’s designers was ‘‘to allow bidders additional time to discuss its bid response.’’ (Doyle & McShane, 2003, p. 21) As we will discuss later however, waivers played a key strategic role in this auction since they could also be used to potentially reduce the final price paid for a license. Bidders that submitted responses of ‘‘Yes’’ or ‘‘Waive’’ were considered to be active at the end of an ascending bid round; bidders that submitted a response of ‘‘No’’ were deemed inactive. The response of each bidder was made public to all of the bidders at the completion of each round. The ascending bid phase continued so long as there were four or more active bidders at the end of a round, and the announced price would rise by no more than 10% each round.9 It is interesting to note that the auction’s designer opted not to follow the suggestion of Klemperer (1998) that the ascending bid phase should end when there were N+1 (i.e., four) active bidders. This was most likely due to the fact that the number of serious bidders in the Nigerian auction was not expected to be more than four or five. Moreover, while the auction designers’ primary concern was conducting a transparent and efficient allocation process, there was an underlying sense among those involved in the auction that some government officials wanted to assure a significant ascending bid phase. If a round of bidding ended with exactly three active bidders, those three bidders were deemed ‘‘successful’’ bidders, and the auction ended with each bidder paying the announced price in the last round in which all successful bidders each responded ‘‘Yes’’. Note that since a bidder responding ‘‘Waive’’ was considered active at the end of a round, this need not be the last announced price. If an ascending bid round ended with strictly fewer than three active bidders, the auction proceeded to the sealed bid phase. 3.1.2. The sealed bid phase If an ascending bid round ended with two or fewer active bidders, the auction entered the sealed bid phase and bidders were divided into three subsets. All bidders who bid ‘‘Yes’’ in the final round proceeded directly to the grant stage of the auction (i.e., a license was reserved for them—at a price to be determined—and they were excluded from bidding in the sealed bid phase). Note that by definition, there could be at most two of these bidders. Bidders who bid ‘‘Waive’’ or ‘‘No’’ in the final round of the ascending bid phase were permitted to bid in the sealed bid phase, and competed for the remaining licenses. Bidders who had bid ‘‘No’’ in a round prior to the final round were not eligible to bid in the sealed bid phase and could not win a license. Each eligible bidder in the sealed bid phase was required to submit a final bid of at least that amount which it last bid ‘‘Yes’’ to in the ascending phase, and at most, the final announced price from the ascending phase. Although the minimum and maximum bid amounts were not to be made public, each bid team could figure this out by keeping track of the publicly announced results during the ascending bid phase. To determine the winners and final price, sealed bids were ordered from highest to lowest and the final license price was defined as the lowest successful sealed bid amount. For example, if there 9
Furthermore, the announced price was not permitted to rise by more than 50% over the final announced price from the previous day. Since bid teams were not permitted to communicate with the outside world during the bid day, this upper bound was implemented so that bidders would know before the beginning of each auction day the maximum they could conceivably be asked to pay before being allowed to confer with management or investors.
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were two licenses available in the sealed bid phase, the final price would be the second highest sealed bid. Each successful bidder, including those bidders who proceeded directly to the grant stage, was to pay the same final price. In the event of a tie during the sealed bid phase, successful bidders were to be determined by the toss of a coin.
4. Lessons from the Nigerian GSM auction The Nigerian GSM auction rules were designed with two normative goals in mind: (1) no successful bidder should have to pay more than it explicitly said it was willing to (either by bidding ‘‘Yes’’ in the ascending-bid phase or through a sealed bid), and (2) all successful bidders should pay the same price for a license. Although the original rules (as described in the December 8th Information Memorandum) reflected these normative goals, it soon became clear that these policy objectives depended crucially on one aspect of the auction design which made bidders extremely uncomfortable: the use of the coin toss as a tie-breaking mechanism. From the standpoint of allocative efficiency, the coin toss was not problematic, since it would only be used in situations where bidders effectively had the same valuation (i.e., when two or more bidders bid the exact same amount in the sealed bid phase). Nevertheless, the possibility of not being allocated a license based on the outcome of a coin toss was extremely unsettling for a number of bidders, and thus the NCC needed to quickly revise its rules to accommodate these concerns. Indeed, some bidders were of the belief that not being allocated a license on the basis of losing a coin toss would have been the worst imaginable outcome, one which could not be justified, after the fact, to senior management, board members, and shareholders. Consequently, four days before the auction was scheduled to begin, the NCC modified the auction rules such that in the sealed-bid phase, there would no longer be a maximum bid amount. Moreover, in the event of a tie, the tied bidders would re-bid, with the new minimum bid being set at the tied bid amount, thus eliminating the need to use a coin toss. Unfortunately however, these seemingly innocuous rule changes put into potential conflict the two normative goals of the auction. By eliminating the maximum bid during the sealed-bid phase, it was now possible that the price to be paid by all three winning bidders exceeded the last announced price to which grant-stage bidders said ‘‘Yes’’—and hence could be expected to pay. This was in direct conflict with the first policy objective—that no successful bidder should have to pay more than it explicitly said it was willing to. In order to resolve this conflict, different prices could be used (i.e., winning bidders from the sealed-bid phase could be required to pay more than grant-stage bidders if necessary), but this would have violated the second policy objective of the auction—that all bidders pay the same final price. In the end, the NCC opted to relax its second policy objective by requiring sealed bidders to pay their bid amount, a rule which was imposed less than 12 hours before the auction began. 4.1. Evaluating an auction mechanism based on a single outcome may lead to undesirable results in the future By virtually all accounts, the Nigerian GSM auction was deemed a complete success (Doyle & McShane, 2003, Section 7). In light of the widespread praise this auction received, other
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government agencies—both in Nigeria and elsewhere—may feel comfortable adopting the same auction format for allocating resources in the future. While the auction exceeded revenue expectations and was extremely well-administered, regulators should be cautious of judging any complex mechanism based on a single outcome. Indeed, the Nigerian GSM auction serves as an excellent example of why regulators need to pay close attention to a mechanism’s general incentive properties—and their possible implications—before deeming the mechanism a complete success. While the revenues raised by the Nigerian auction exceeded virtually everyone’s expectations, the auction result could have been much different. The possibility for a disappointing outcome arises from the rule which determines the final price when the ascending bid phase ends with exactly three active bidders. In this case, the final price paid by the three successful bidders was defined as the announced price in the last round in which all three successful bidders each responded ‘‘Yes’’. Since a bid of ‘‘Waive’’ maintained a bidder’s status as an active bidder, there was a strong incentive to use waivers even when the announced price was less than a bidder’s bid ceiling.10 This strategic incentive to use waivers was balanced by the desire to preserve them for situations in which they were needed for non-strategic reasons, such as requiring additional time to make a decision. Although in many endgame scenarios, the rule for determining the final price produces the ‘‘correct’’ price, it is not hard to conceive of examples in which the Nigerian Government could have received significantly less revenue than they were entitled to because of this detail in the rules. Consider the example described in Table 1. In this example, the auction ends in round 8 since the number of active bidders falls from four to three. It would not be unreasonable to expect the three successful bidders (A, B and C) to each pay $160 million, since all three of these bidders said ‘‘Yes’’ to an announced price of at least this much. According to the auction rules however, each of the winning bidders would only be required to pay the first round price of $100 million, since this is the only price at which they all simultaneously responded ‘‘Yes’’. An alternative rule which would eliminate this possibility would be to require each successful bidder to pay the last announced price at which all three successful bidders said ‘‘Yes’’ to that price or a price higher than it. In the example above, this would have increased the Nigerian Government’s auction revenue by 60%. In the actual auction, this detail in the rules did not impact that amount of revenues generated. Nevertheless, future auctions adopting a similar design would likely benefit from making this slight—albeit important—rule modification.11 4.2. The auction results The auction proper lasted three full days. On Day One, every bidder bid ‘‘Yes’’ to each of the six announced prices and therefore, prices at the end of Day One had reached $150 million. On Day Two, one waiver was used in round 2 by United, which subsequently bid ‘‘Yes’’ in the 10
The fact that waivers played a strategic role in the auction was well-understood by the auction’s designers. For example, Doyle and McShane (2003) suggest that the ‘‘optimal strategy’’ was for a bidder to play a sequence of three waivers before saying no to an announced price above its valuation. 11 While it is not known why the auction designers chose their particular price determination rule, it is possible that they believed there was a fairly straightforward strategy which all bidders would adopt—and that this strategy did not involve using waivers in the manner described in Table 1. This interpretation would be consistent with Doyle and McShane (2003) which suggest that most of the bidders bid irrationally during the auction.
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414 Table 1 Round
1 2 3 4 5 6 7 8
Announced price ($ millions)
100 110 120 130 140 150 160 170
Bidder action
Active bidders
A
B
C
D
E
Yes Waive Yes Yes Waive Yes Yes Waive
Yes Yes Waive Yes Yes Waive Yes Yes
Yes Yes Yes Waive Yes Yes Waive Yes
Yes Yes Yes Yes Waive Waive Waive No
Yes Yes Waive Waive Waive No
5 5 5 5 5 4 4 3
remaining four rounds that day. By the end of Day Two, many of the bidders were clearly beginning to express some anxiety over the fact that all bidders except United had failed to show any sign of weakness. Finally, on Day Three, MSI, which was generally considered to be one of the experienced bidders, used three successive waivers starting in round 2. In round 3, both MSI and United used waivers, thus, both bidders had used two of their three available waivers. In round 4, MSI used its third and last waiver, and MTN used its first waiver. Somewhat surprisingly, United chose to bid ‘‘No’’, despite the fact that it still had one unused waiver. In round 5, Econet used its first waiver, MTN used its second waiver, and MSI bid ‘‘No’’. Since round 5 ended with exactly three active bidders, the auction ended without the need to proceed to the sealed bid phase, and all winning bidders were granted provisional licenses at the price of $285 million, the announced price from round 3 of that day. Table 2 summarizes the auction results, round by round.
5. Conclusions The Nigerian GSM auction, by virtually all reports, was considered to be a success. The final license price of $285 million per license was substantially more than the government had expected to raise. Indeed, given the somewhat disappointing results (from the point of view of the governments involved), of the previous few 3G auctions in Europe, the Nigerian GSM auction surpassed virtually everyone’s revenue expectations and, based on ‘‘addressable’’ users, raised more revenue per capita than the 3G auctions in the Netherlands and Italy.12 Although the Nigerian GSM auction was perceived to be a complete success based on the revenues it raised, the outcome could have been much different, and many important lessons can 12
Based on 10 million potential Nigerian users, the Nigerian GSM auction raised roughly 95 Euros per capita, compared to 34 Euros per capita in the Netherlands and 42 Euros per capita in Italy. Moreover, if one were also to adjust for differences in income, the Nigerian auction raised more per capita than any other spectrum auction to date. It should be noted, however, that Nigeria has one of the lowest teledensities in the world, at 0.4 mainlines per 100 people, and the highest revenue per mainline, at $3738 per year. Source: World Telecommunication Development Report 2000, International Telecommunication Union.
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Table 2 The auction results Day
Round
Announced price ($ millions)
Bidder action CIL
Econet
MSI
Active bidders MT
United
1 1 1 1 1 1
1 2 3 4 5 6
100 110 121 130 140 150
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
5 5 5 5 5 5
2 2 2 2 2 2
1 2 3 4 5 6
165 178 190 200 212 225
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
Yes Waive Yes Yes Yes Yes
5 5 5 5 5 5
3 3 3 3 3
1 2 3 4 5
248 265 285 295 300
Yes Yes Yes Yes Yes
Yes Yes Yes Yes Waive
Yes Waive Waive Waive No
Yes Yes Yes Waive Waive
Yes Yes Waive No
5 5 5 4 3
be drawn from observing how its rules evolved. The experience of the Nigerian GSM auction provides valuable insight into some of the challenges facing regulatory agencies tasked with administering spectrum auctions. Bidders often have concerns which may be overlooked by auction designers, since they are unlikely to occur in equilibrium, or fail to have negative implications on issues which auction designers are typically the most concerned with, such as economic efficiency. Moreover, the auction serves as an excellent example of why an allocation mechanism such as an auction needs to be evaluated by more than a single outcome if it is to be used for subsequent resource allocations in the future. Thus, the experience of the Nigerian GSM auction should be of interest to regulatory agencies considering the use of spectrum auctions since it demonstrates how the concerns of bidders may influence an auction’s final design and that despite their careful design, potentially costly oversights in auction rules can still remain.
Acknowledgements The author thanks Oscar Volij and an anonymous refree for helpful comments.
References Ausubel, L., & Cramton, P. (2002). Demand reduction and inefficiency in multi-unit auctions. College Park, Maryland: University of Maryland Discussion Paper.
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