Spectrum Pricing and Spectrum Economics

Market Mechanisms

In economic terms, a market economy is one where most of the decisions (about resource allocation) are made by use of the markets. This is in contrast to a planned economy where the regulator makes the decisions. The advantage of a market economy is that price conveys information about the relative values of demand for the resource.

Market mechanisms are the vehicles used to make these decisions in which price represents relative demand. Examples in spectrum management include so called 'administered incentive pricing' and auctions. Under auctions, the highest bidder is awarded the spectrum. Under AIP, the regulator emulates the market and sets an appropriate 'market' price for the resource. Generally auctions are used when the cost of the auction is low compared to the price paid. Auctions are useful when the price is not clear at the outset and this is generally the case with large blocks of spectrum made available in the so-called 'sweet spot'. AIP is often used when there is a large number of small blocks of spectrum to be allocated across a long period of time.

In some countries, the spectrum cannot be auctioned. This means that despite the conditions for auction being met, the market cannot be used to signal demand through price. In this case, the regulator makes a direct spectrum award after consideration of all applications. This is sometimes referred to as a 'beauty contest' where the applicants parade and the regulator chooses the operator who would contribute most to the nation-state. Opportunity costing can be used to make a 'market price' assessment of the fees to be charged.

InterConnect Communications has undertaken many studies into the use of market mechanisms in search of allocative efficiency. Across the world, many different political regimes successfully run countries. InterConnect has worked in most forms of regime from those near the market economy to those more like planned economies and its consultants are able to mould market mechanisms and other vehicles to suit the needs of the nation-state.