Anonymous bidding and not so anonymous shakedowns at the FCC

Say what you like about Martin in other areas, but he is (so far) sticking to his guns on whether to require anonymous bidding for the upcomming AWS spectrum auction. MAP has actively supported this proposal, because it will make the auctions work better and facilitate entry by minority owned businesses and new, disruptive competitors (I’m stuck with them by statute, so I may as well try to get them to work right).

In perhaps the most telling evidence that anonymous/blind/sealed bidding (in which the identity of the bidder is not disclosed during the action) is a good idea, every incumbent (except VZ Wireless, which has been “targeted” in certain auctions) is lobbying fiercly against it. My favorite little tidbits of when the Sausage Factory turns nasty below.

This all started out when the FCC’s Chief Economist, Leslie Marx, recommended that the FCC change its auction bidding rules from open, ascending bid auctions (where the identity and amount of each bid is known) to sealed bid auction rules (also called “blind” bidding or “anonymous” bidding). Unlike most changes at the FCC, which happen because someone lobbies for them or Congress passes a law, the proposal to shift to anonymous bidding appears to have come from the fact that it works better. Open ascending auctions are subject to manipulation by repeat bidders over time since they are familiar with each other, can enforce rules developed by tacit collusion over time, and can use odd bids or preemptive bids to expressly communicate during the auction.

This conclusion will be remarkable familiar to anyone who has played the card game “bridge” and is familiar with “bidding conventions.” If my partner and I are playing with a standard set of conventions, and I open “one no-trump” or “2 clubs” or “3 diamonds,” my partner and everyone else at the table know what that means (at least in a general way).

Unsurprisingly, the same thing happens in FCC auctions over time. As a result, the first auctions in the mid-1990s were very competitive. Over time, things have settled down, and the same bidders win in most auctions for prices significantly below the FCC’s minimum “reserve price.” A rather extensive literature has been written about the subject generally and FCC auctions in particular.

Marx, a professor on the subject at Duke and familiar with the problems of FCC auctions, therefore proposed to change the rule to anonymous bidding. Parties see bids, but don’t know who made them. As a consequence, the ability to signal is diminished, and the ability of players to punish those who break the unwritten rules (by, for example, bidding up licenses the rule breaker wants) is reduced. Anonymous bidding also facilitates new entrants by allowing a smaller player to challenge a larger player for a license. The larger player does not know who it faces, and therefore must bid based on actual perceived value of the license rather than on the assesed strengths and weaknesses of the opposing bidder.

So Dr. Marx proposed the change as a bureau rule, with support of Chairman Martin, for no reason other than it is, in fact, a better rule. And thus did Dr. Marx win herself a free trip to the Sausage Factory, because of course all of the companies that have been using FCC auctions to discourage the entry of competitors and save a couple of billion on revenues were not going to sit still and let the FCC change the rules to make them work better. Are you nuts?

As an initial mater, T-Mobile brought in Dr. Peter Cramton, a heavyweight in the auction world, to try to persuade Leslie Marx that anonymous bidding was a bad idea because FCC auctions have worked well in the past — precisely (Dr. Cramton argued) because maximizing available information maximizes the efficiency of the auction.

The only problem with this approach is that Cramton wrote a paper in 2000 with Jesse Schwartz reaching the opposite conclusion and a second paper in 2002 affirming the 2000 paper. Ooopy. “For bribery blinds the eyes of the wise, and twists the tongues of the righteous.” But I’ll bet he has lifetime free use of T-Mobile hotspots.

As time has gone on, just about every incumbent except Verizon Wireless has come in to explain to the FCC what an incredibly bad idea anonymous bidding would be. As we just pointed out in our own filing (not yet available on ECFS), this unanimity of opinion among incumbents is entierely predictable based on their interest in maintaining the current collusive structure. The “efficiency” of information in this case is precisely the problem. It allows large players to lay down claims and allows small players to avoid large players or face retaliation. From the perspective of promoting new entry or maximizing revenue, that sucks rocks.

Faced with incontrovertible economic arguments and a wealth of literature in support of sealed bidding (check out the papers on Paul Klemperer’s website), the illusion that this is anything but naked self-interest and politics has started to slip away. Communications Daily (3/28/06) reports that 7 CEOs of wireless companies and the two investment firms that service them and their designated entity catspaws have made a direct appeal to Chairman Martin to try to change his mind. As the article relates, having the CEOs of companies like Cingular sign the letter to Martin is intended as a “shock and awe” political campaign rather than a fight on the merits. While the official letter mouths the usual platitudes about efficiency and how well FCC auctions have worked to date, and makes the mandatory but ludicrous threat that anonymous bidding will deter the incumbents from bidding (because the incumbents would sooooo much rather have licenses go to cable companies or genuinely disruptive competitors), one company rep made the reality abundantly clear:

“You can’t go to the FCC and argue with an economist. This is a political play. These are businesses and this is of critical importance to these businesses. Economic theories be damned … We’ll be suited up and at the FCC.”

One rarely finds such honesty here in the Sausage Factory, but I admit it’s bracing when you do. Nothing like a clear line drawn for the FCC “we know the current rule facilitates collusion, keeps out competition, and supresses the price paid at auction. That’s a feature, not a bug. Now stop messing with us or we’ll get all-nasty pac on your ass and have some of our subsidiaries on the Hill roast you at a hearing.”

Martin’s response so far has been to schedule the matter for a vote at the Commission’s April 12 meeting (at least according to the trade press).

Well, I hope Martin and the other Commissioners gives ’em Hell.

Stay tuned . . .

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