Analysis of policy instruments for enhanced competition in spectrum auction

Market based spectrum allocation should be competitive and economically efficient to effectively use the spectrum. Yet infrastructure markets have a tendency to become natural monopolies or oligopoly due to the high fixed costs and inherent economies of scale. Instruments such as set-asides, bidding credits, spectrum caps, band plan and auction designs are some of the market-based solutions that can enhance competition by incentivizing new entrants in these types of markets. In this paper, we focus on the "set-aside" instrument and study its role as a policy instrument to promote competition and encourage entry of new enterprenuers. The experimental results show that "set-aside" can be a powerful instrument and its impact depends upon the number of licenses that are set-aside versus the number of new entrants in the market as well as the level of competitiveness of the new entrants. We use a three factorial experimental design and find that contrary to our expectation, the total revenue generated by FCC does not necessarily decrease by having set-asides. As the number of new entrants increase and the set-asides decrease, the average total revenue raised through the sale of licenses can be more than the base case.