3G Auctions in UK: Q&A

The last chapter of Paul Klemperer's famous auction book provides non-technical answers to the FAQs on spectrum auctions, especially on the 3G auction that he (and Ken Binmore) designed and implemented in the UK.



The chapter titled "Were Auctions a Good Idea?" is based on his newspaper article, "The Wrong Culprit for Telecom Trouble" appeared in Financial Times (Nov. 26, 2002) where he listed three typical critics against 3G auctions:

The critics assume three things, that 

1: the telecoms companies paid more for the licenses than they thought the licenses were worth

2: this expenditure has reduced investment in 3G

3: it destroyed the telecoms companies' market value

Paul answers to each question as follows:

1. It is now hard to imagine any company voluntarily paid billions for a 3G license. But volunteer they all did - and they celebrated their victories. (...) Like any other market, an auction simply matches willing buyers and willing sellers - it cannot protect them against their own mistakes.

2. The auction fees are history; they have (almost) all been paid in full, cannot be recouped by cutting investment, and make no difference to its profitability. (...) Investment in 3G, as in anything else, is primarily motivated by attractive returns in the future - not by money spent in the past.

3. All in all, it seems a stretch to blame $100bn of shareholder misery on $100bn of 3G license fees.

Then, he concludes the article by saying:

There is nothing special about an auction: it is just another market. Buying houses or shares at the peak of a housing or stock-market boom does not entitle anyone to compensation. Why should we make an exception for the phone companies?

(...)

The main effect of the license fees was simply to transfer $100bn from shareholders around the world to certain European governments. This was both equitable, since the companies were buying a public asset that they valued this highly at the time, and efficient, since such a lump sum transfer is much more efficient than most forms of taxation. Efficient, equitable and voluntary government funding is not easy to find: perhaps we should be more enthusiastic about it.