Economics: Auction and Auction Design

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Introduction

Economics is a broad subject and entails a variety activities, auctioning being one of them. An analysis of the commercial ventures between individuals, business organizations or even states enable individuals to be acquainted with information concerning commercial ventures. Auctioning has been adopted as an imperative form of conducting business activities around the world; in firms, and even on governmental levels (Skousen, 2011, p. 138). This paper is intended to give a report on the Indian spectrum auctions, comment on the auction design that was adopted so as to enhance its success and failure factors, and implications and outcomes in terms of the revenue raised and economic efficiency associated with the auction (Andreas, 2007, p.72).

The Indian Spectrum Auctions

This paper gives detailed information concerning the organization and execution of the Indian spectrum license auction. The outcomes of the auction in terms of economic revenues amounted to about $21.54 billion; this was derived from 3G and broadband wireless auction (Hurn, et al 2004, p. 19). This affirmation has an implication that the benefits from the 3G and BWA raised a great deal of money for the Indian government. This led to economic expansion as the funds were invested in other parts of the world. The execution of the auction involved intensive planning since there was a need to have adequate information on the importance of reviewing the auction design to suit the changing circumstances in the economic setting (Gruber, 2005, p.88).

It is worthwhile noting that well-designed auction designs promote effective allocation of resources to those who can use them in the most valuable way. This has an insinuation that instead of relying on the government procedurals in assessing the merits of competing firms’ business plans, auctions can be used in getting information from investors that could otherwise not be available to the government (Cave, 2006, p.68). The 3G and BWA auctions were conducted through analysis of information from the bidders and not through assessment of bureaucratic steps by the government. This meant that less time was wasted and that appropriate economists were chosen to aid in the facilitation of increased economic benefits from the venture. Irrespective of these affirmations, auctions are also faced with problems such as unfairness including raising of consumer prices and reduction of investments.

The Indian spectrum auction was viewed as one of the widespread agreements among economists as a form of allocating scarce spectrum resources. Auctions have been a preferred mechanism for assigning spectrum resources in many parts of the world. The Indian spectrum auction was very advantageous as it created competition among license applicants. The competition created in the Indian market was not wasteful as it enhanced provision of high levels of revenue that was used in the offsetting of unpleasant taxation policies (Gruber, 2005, p.96). All these assertions point to the significance of the auction that was conducted; increased revenue, facilitation of efficiency in the auction design and creating, increasing and sustaining downstream competition in the market. This means that an analysis of the market conditions and the needs of the customers ought to be undertaken before deciding on the auction model that can be adopted so as to enhance market efficiency (Hurn, et al 2004, p.22).

Auction Design Issues in Indian Spectrum Auction

It is imperative to be aware of the auction design factors that were put in consideration so as to enhance the success of the Indian spectrum auction; with resulting economic benefits of an increase in economic growth. The issues considered in designing an auction include; the need to discourage collusion among prospective bidders, nature of the licenses offered on the market to attract bidders ought to be well known (Gruber, 2005, p. 103). The bidding process could either be open or sealed, depending on the system used by the auctioneers. The open system reveals information about the buyers’ valuations and thus enhances efficient assignment of bids. The sealed bid auctions on the other hand do better at promoting entry as they offer entrants a better opportunity of winning against strong incumbents (Bailey, 2008, p.191).

The simultaneous multi-round auction or SMRA design was proposed and was used to ascertain the different bidders who were assigned different licenses and at specific prices (Illing, 2004, p.325). The adoption of the SMRA design model and its complimentary simultaneous ascending design ensured that each bidder was restricted to a single license. This acted as a springboard for reducing cases of collusion among bidders was in India. The design was important as it ensured efficacy and appropriateness in the allocation of bids to the participants in the spectrum auctions. The design involved a series of multiple rounds of simultaneous bids. In the first round each bidder made a bid on one license, and to remain in the auction, a bidder had to be active in subsequent rounds (Andreas, 2007, p.91).

The success of this design in the spectrum auction in India was attributed to the simplicity of the bidders’ strategies. This implies that bidders had to make bids that could maximize their profits or returns if that bid were the last one (Skousen, 2011, p.128). This design was also aided by the generation of an efficient outcome when bidders are required to make bids in a series of rounds. The auction design ought to be developed in a manner where the bidder with the highest private value wins and not the one with the highest social value; this is because these values differ as the winners compete in a marketplace (Gruber, 2005, p.99). The competitive policy played a significant role in the design of the simultaneous ascending design approaches in the spectrum auction. This aided in preventing collusive, predatory, and entry deterring behavior of the new entrants in the market.

Implications from the Indian Spectrum Auction

The Indian spectrum auction was successful and had a variety of implications in terms of participation incentives, the existence of coordination among bidders, and outcomes in terms of revenue raised (Illing, 2004, p.336). This has an insinuation that the auctions aided in the development of the economic sector in its entirety due to the immense benefits that were associated with it. The government used SMRA design so as to encourage participation in the auction by new entrants and not only the incumbent bidders (Bailey, 2008, p.197). Given that the auction design adopted could not allow sharing or owning of more than once license, it meant that more entrants could be attracted in the market.

The designers of the auction model were concerned that application of an ascending auction could prevent new business units from bidding strongly in the auction, or even from venturing in the auction at all (Andreas, 2007, p.87). This made it appropriate for the government to use the SMRA design model. An ascending model could have continued until few bidders remained, after which the survivors would have made sealed bids. The bids were not to be lower than the prevailing price levels for the licenses (Illing, 2004, p.329). This was an attraction to several new entrants and thus aid in offsetting the problems of collusion and entry deterrence (Skousen, 2011, p.141).

Conclusion

It is exceptionally pivotal to note that the Indian spectrum auction had immense positive effects to economic development, as attributed to the fact that it contributed to efficient communication systems and development of the GNP. The spectrum auctions resulted in both short term and long term economic benefits, for the government and auction specialists who aided in developing the bidding strategy. The auction strengthened the competitive forces among business operators (especially the mobile phone operators). This means that there is an increased rate of economic expansion due to the expansions of the business organizations in a bid to attain competitive advantage (Bailey, 2008, p. 199). The design of the auction plays a vital role in ensuring that fraud, collusion and deterrence to entry in the market by the new bidders are avoided. This will enhance competition and efficacy in the commercial transactions within states in a country.

References

Skousen, M (2011). EconoPower: How a New Generation of Economists is Transforming the World. John Wiley and Sons. pp. 128-143.

Bailey, M (2008). Economic Impact of Third-Generation Wireless Technology. DIANE Publishing. pp. 191-199.

Cave, M (2006). Handbook of Telecommunications Economics: Technology evolution and the internet Volume 2 of Handbook of Telecommunications Economics, Emerald Group Publishing. pp. 68-81.

Illing, G (2004). Spectrum auctions and competition in telecommunications CESifo seminar series. MIT Press. pp. 322-336.

Hurn, S, et al (2004). Contemporary issues in economics and econometrics: theory and application. Edward Elgar Publishing. pp. 18-27.

Gruber, H (2005). The economics of mobile telecommunications The Economics of Mobile Telecommunications, Cambridge University Press. pp. 86-103.

Andreas, C (2007). The British Telecom Industry Akademische Schriftenreihe. GRIN Verlag. pp. 71-93.