A Policy Framework for Spectrum Allocation in Mobile Communications

Abstract

With the National Broadband Plan’s promise of an additional 500 MHz of spectrum for commercial purposes, the question of how to allocate those resources among competing uses and users will dominate the communications policy debate over the coming years. In this policy paper, we provide a theoretical analysis of some of the relevant tradeoffs involved in allocating spectrum among service providers, with a particular focus on incumbent-exclusion rules such as spectrum caps. Two key assumptions center the analysis: (i) more firms implies lower prices (i.e., Cournot competition); and (ii) more spectrum permits more advanced services due to greater capacity and throughput. The derived theoretical tradeoff is straightforward: In a setting with many firms with little spectrum, there are low prices but relatively less advanced services; however, in a setting with fewer firms with larger allotments of spectrum, there may be higher prices but also more advanced services. Our analysis highlights several key components of the spectrum allocation decision. First, an incumbent-exclusion rule is not “pro-entry,” but instead seeks to select one form (price cutting) of entry over another (quality improving). Second, given the existing number of firms, the potential for sizeable competitive price effects is low. Third, the economic benefits of advanced wireless services are likely to be very high. Fourth, access to spectrum resources does not necessarily convey financial success, as spectrum is but one of many inputs necessary to provide service. In all, we believe these facts, interpreted in the context of the theory, suggest incumbent-exclusion rules are not welfare enhancing, at least in the United States.

Keywords: Spectrum, Spectrum Exhaust, wireless, broadband, Federal Communications Commission, incumbent exclusion rules, auctions

JEL Classification: K23, L50, L51, L52, L96, O33, O38