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"Designing a Mechanism for Spectrum Trade toward Efficient Reallocation," ITS Montreal 2008, 25 June 2008. Paper also presented at Workshop on Spectrum Management in a Liberalized Environment: Implications for Thailand and Lao PDR, August 7-8, 2008, Bangkok, and the 36th Research Conference on Communication, Information, and Internet Policy (TPRC 2008), Arlington, VA, USA, September 26-28, 2008, and at Workshop on Spectrum Valuation for 3G Services: Application of the 1900 MHz band in Thailand, November 14, 2008, Bangkok.
[Abstract]

This paper attempts to design and analyze an economic mechanism of spectrum trade for efficient reallocation. It first points out that, because of the vested right, sunk cost, and technological externalities accompanying the spectrum use, market mechanism, if introduced spontaneously, would not work well as it would with ordinary goods and services. The reason is that the chance is small for a potential user of spectrum to find an incumbent who would agree to trade his/her spectrum block with vested right obtained, and the sunk cost invested, in the past. Further, even if the potential user can find such an incumbent, he/she will act as a local monopolist to the potential user and likely quote an extremely high price for (i.e., hold up) the spectrum.

We note that, for efficient reallocation of spectrum blocks, it is necessary that both the demand price and the supply price of the block be revealed truthfully in some way or other; otherwise, it is impossible to judge whether a particular reallocation is, or is not, Pareto-improving. The demand price of a spectrum block may be obtained through auction. There is no mechanism, however, for having the incumbent reveal the supply price.

To overcome this difficulty, the paper proposes an “extended market mechanism” for spectrum trade in which each user of spectrum be obliged to reveal the supply price (C) of his/her spectrum block, the amount, however large, for which the user is willing to yield the spectrum. Further, if an offer is made at a price at least as great as the supply price, then the user be obliged to trade the spectrum to the party making the offer. Second, each user pay to the government annually a “spectrum-holding fee” equal to the product rC of the supply price (C) and the fee rate (r), the latter to be determined by the government. This is to prevent the user from claiming an unjustifiably high supply price; further, the fee may be regarded as a “tax” on using spectrum, which is the property of the society as a whole. Thus, in this mechanism, each spectrum user would either continue to use his/her spectrum block with the annual payment rC or cease using it for once-and-for-all compensation C.

The paper will formulate such a mechanism into an economic model and analyze it to find how it works under various conditions. Welfare implications will also be investigated. Further, the paper considers how to deal with a block of spectrum used as commons within the framework of this mechanism, and how to form a supply price when indirect spectrum users such as subscribers to mobile telephony are involved. Finally, the paper proposes a strategy according to which the current command-and-control mechanism may be transformed gradually, in contrast to big-bang, into the proposed market mechanism.

This paper is an extension of Oniki [2004] (See also this), in which a mechanism was given to reallocate spectrum through forced acquisition by the government; this paper intends to propose a mechanism for spectrum trading in general.

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[Keywords]

spectrum resources, spectrum reallocation, spectrum assignment, market mechanism, efficient use

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[Text]
(Presented at) The 36th Research Conference on Communication, Information, and Internet Policy (TPRC 2008), Arlington, VA, USA, September 26-28, 2008

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[Presentation Materials]
(4) Workshop on Spectrum Valuation for 3G Services: Application of the 1900 MHz band in Thailand, November 14, 2008, Bangkok.
(3) (TPRC 2008, September 26, 2008, George Mason University, USA.
(2) Workshop on Spectrum Management in a Liberalized Environment: Implications for Thailand and Lao PDR, August 7-8, 2008, Bangkok
(1) 17th Biennial Conference of the International Telecommunications Society (ITS), June 24th - 27th, 2008, Montreal

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[Miscellaneous]

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Hajime Oniki
ECON, OGU
03/11/2009
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