Radio Spectrum and the Disruptive Clarity of Ronald Coase

Abstract

In the Federal Communications Commission, Ronald Coase exposed deep foundations via normative argument buttressed by astute historical observation. The government controlled scarce frequencies, issuing sharply limited use rights. Spillovers were said to be otherwise endemic. Coase saw that Government limited conflicts by restricting uses; property owners perform an analogous function via the “price system.” The government solution was inefficient unless the net benefits of the alternative property regime were lower. Coase augured that the price system would outperform. His spectrum auction proposal was mocked by communications policy experts, opposed by industry interests, and ridiculed by policy makers. Hence, it took until July 25, 1994 for FCC license sales to commence. Today, some 73 U.S. auctions have been held, 27,484 licenses sold, and $52.6 billion paid. The reform is a textbook example of economic policy success.

Herein, we examine Coase’s seminal 1959 paper on two levels. First, we note its analytical symmetry, comparing administrative to market mechanisms under the assumption of positive transaction costs. This fundamental insight had its beginning in Coase’s acclaimed article on the firm, and continued with his subsequent treatment of social cost. Second, we investigate why spectrum policies have stopped well short of the property rights regime that Coase advocated, considering rent-seeking dynamics and the emergence of new theories challenging Coase’s property framework. One conclusion is easily rendered: competitive bidding is now the default tool in wireless license awards. By rule of thumb, about $17 billion in U.S. welfare losses have been averted. Not bad for the first 50 years of this, or any, Article appearing in Volume II of the Journal of Law & Economics.

Keywords: Abba Lerner, Adam Smith, airwaves, bundle of rights, Coase Theorem, comparative hearings, cost-benefit analysis, externalities, George Stigler, Harold Demsetz, Hotelling, institutional symmetry, jump bidding, Leo Herzel, Milgrom, Narrowband Personal Communications Services, Nirvana Fallacy, Pigou

JEL Classification: B21, B31, D62, K11, K23, L51, L96, P14