The Combinatorial Clock Auction from a bidder’s perspective

Peter Cramton13 January 2012

2

The setting

• Each carrier needs spectrum to provide 4G LTE service• Desired attributes of service

Coverage Capacity Speed

• 700 MHz: 9 lots of 2x5 MHz Ideal for coverage

• 2.5 GHz: 7 lots of 2x10 MHz in each region Ideal for capacity

• Each carrier desires contiguous spectrum Larger contiguous blocks (up to 2x20 MHz) enable greater speed

• Specific frequencies within band are of secondary importance

The goal

• Acquire profit maximizing spectrum package Preferred quantity of 700 MHz and 2.5 GHz spectrum recognizing

benefits and costs of additional spectrum Benefits: lower buildout cost; improved coverage, capacity and speed Costs: higher spectrum expense

3

Valuation model

• Determines value of alternative spectrum packages recognizing Minimum requirements Incremental value from additional lots of 700 MHz or 2.5 GHz

4

700 MHz lots(2x5 MHz)

2.5 GHz lots(2x10 MHz) Coverage Capacity Speed Value

3 3 +++ +++ ++ $$$$$$

2 2 ++ ++ ++ $$$$$

2 1 ++ + + $$$$

1 2 + ++ ++ $$$

1 1 + + + $$

0 2 ++ ++ $

Bidding tool

• Includes valuation model and adds auction state Prices Activity

• Supports bidder decision making throughout allocation stage• Helps translate valuation model into bidding strategy

5

700 MHz lots(2x5 MHz)

2.5 GHz lots(2x10 MHz) Coverage Capacity Speed Value Cost Profit

3 3 +++ +++ ++ $$$$$$ $$$$$ $$

2 2 ++ ++ ++ $$$$$ $$$ $$$

2 1 ++ + + $$$$ $$ $

1 2 + ++ ++ $$$ $ $$

1 1 + + + $$ $ $

0 2 ++ ++ $ $ $

Key features of CCA

• Enhances substitution Use of generic lots (all lots in same category are perfect substitutes) Bid quantity of contiguous spectrum in 700 MHz and 2.5 GHz bands

• Encourages price discovery Simple price process in clock stage Helps bidder focus valuation effort on most relevant packages

• Induces truthful bidding Pricing rule to encourage bidding based on intrinsic valuations Activity rule to encourage truthful bidding throughout the auction

6

CCA simplifies bidding relative to SMRA

• Complex gaming strategies are avoided as a result of Anonymous bidding Generic lots Package bids (no exposure) Effective pricing and activity rules

• Bidding on most profitable package throughout the auction is an effective strategy

• Bidder can focus on valuing relevant packages, not complex bidding strategy

7

Mechanics of bidding

Lot Configuration for purposes of example*** Not intended to be preferred configuration ***700 MHz:Nationwide …

Lower:1 Lot2 Categories: Upper: 8 Lots

(Paired)

(5 MHz blocks)703 748 758 803

2.5 GHz:Regional ACT

NSWNTQLDSATASVICWA

1 Category: 7 Lots

(10 MHz blocks)

…

2500 2570 2620 2690

(Paired)

Auction Information*** Spectrum caps are just examples ***

10

Auction Process

Round opens

Bidders place bids

Round closesDo any products

have excess demand?

yes

Results from previous round are published

Prices for next round

announced

noSupplementary

Round

End of Clock

RoundsAssignment

Stage

Clock Rounds

Allocation Stage

11

Auction Schedule for Clock Rounds

12

Price

Aggregate DemandSupply

Round 2

P2

Closing Price

Clock stage

Round 1

P1

P5Round 5

Round 4P4

Round 3P3

13

Auction Process – Bidding in a Clock Round

Round opens

Bidders place bids

Round closesDo any products

have excess demand?

yes

Results from previous round are published

Prices for next round

announced

noSupplementary

Round

End of Clock

RoundsAssignment

Stage

Clock Rounds

Allocation Stage

14

Bidding in Round 1 – Specifying Number of Lots

15

Bidding in Round 1 – Package Bid Saved

16

Auction Process – Viewing Results

Round opens

Bidders place bids

Round closesDo any products

have excess demand?

yes

Results from previous round are published

Prices for next round

announced

noSupplementary

Round

End of Clock

RoundsAssignment

Stage

Clock Rounds

Allocation Stage

17

Viewing the Results of Round 1 and Round 2 Prices

18

Specifying a New Package in Round 2

19

Immediate Feedback if your Bid is Invalid

20

A Summary of all Clock Packages Placed

211 . | . . 1 . 2 . 1 2

700 MHz | 2.5 GHz

upper lower | ACT NSW NT QLD SA TAS VIC WA

Package abbreviation format:

Auction Process – Supplementary Round

Round opens

Bidders place bids

Round closesDo any products

have excess demand?

yes

Results from previous round are published

Prices for next round

announced

noSupplementary

Round

End of Clock

RoundsAssignment

Stage

Clock Rounds

Allocation Stage

22

Bidding in the Supplementary Round:Initial Set of Bids from Clock Rounds

23

Bidding in the Supplementary Round:Improving bids placed in the Clock Rounds

24

Bidding in the Supplementary Round:Adding further Packages using upload facility

25

Auction Process – Assignment Stage

Round opens

Bidders place bids

Round closesDo any products

have excess demand?

yes

Results from previous round are published

Prices for next round

announced

noSupplementary

Round

End of Clock

RoundsAssignment

Stage

Clock Rounds

Allocation Stage

26

Bidding in the Assignment Round:Initial Prices for all Frequency Options are Zero

27

Bidding in the Assignment Stage:Specifying a Price for a Particular Frequency Range

28

Bidding in the Assignment Stage:Reviewing Bids Placed for all Frequency Options

29

30

Final Results Screen