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Brazilian Auction Success

June 13, 2012

On June 12, the Brazilian regulator, Anatel, conducted its first 4G spectrum auction, selling spectrum in the 2500MHz band. By far the most valuable spectrum licenses sold in this auction were the paired bands optimized for use with LTE-FDD. These bands, however, were packaged with obligations to supply service to rural populations, using the 450MHz bands and an older technology known as CDMA.

Paul’s client in the auction - Telefonica-Vivo - acquired the most valuable band in the auction, paying R$1.05 billion. This band included 40MHz of paired spectrum.

The bidding strategy challenge in this auction was to develop a plan that would be robust. It needed to be able to win sufficient spectrum in case the bidding competition was fiercer than expected, but also able to take advantage of low competition if that occurred.

The auction rules made this challenging by its combination of sealed bid and outcry stages. Sealed bids for all licenses were submitted on June 5 - a week before the outcry bidding began. The bids for each lot were opened on auction day (June 12) just before the outcry bidding began for that lot. Only the two highest sealed bidders for each license plus any bidder whose sealed bid was within 70% of the highest bid would qualify for the outcry stage. However, bidders were capped to win no more than 40MHz, and the four licenses for sale in the auction (labeled as W,X,V1,V2) had bandwidths of 40, 40, 20 and 20 MHz. So, if a bidder were to win the W license, it could not compete for X and its sealed bid for X would never be opened.

Vivo’s sealed bid for the first license - the W license - was made at the reserve. This bid positioned Vivo to win the license cheaply in case other strong bidders bid only for the more valuable X license. When two other competitors - Claro and Oi - also bid the reserve for that license, Vivo immediately passed.

This pass left Claro, the second largest competitor, with a choice between winning the W license by bidding against Oi or trying for the X, where it would have to outbid Vivo to win. This is no choice at all. As expected, Claro bid for and won the W license, paying R$845 million.

The W outcome positioned Vivo to bid against only weaker bidders to acquire its preferred X license. Vivo’s sealed bid for the X license had been calibrated to be lower than the expected final price of that license but high enough to eliminate almost completely the danger of being excluded from the outcry. For the X license, TIM joined Oi and Vivo in submitting a sealed bid, but only Vivo and Oi raised prices during the outcry stage. Oi’s final bid was at R$1 billion, and Vivo bid the minimum 5% increment to win the license. This premium over the cost of the W license represented very good value for Vivo.

With little competition remaining, TIM and Oi subsequently bid for won the smaller V1 and V2 licenses at prices just 5% above the reserve. This seems to reflect good planning by TIM in convincing Anatel to change its original plan to offer three 40MHz licenses and instead offer these four particular license sizes in this sequence. Unable to bid to win the larger licenses, TIM found itself able to acquire smaller licenses at a low price that had been made almost inevitable by the auction rules.

Milgrom to Advise FCC on “Incentive Auctions”

March 27, 2012


“FCC Chairman Julius Genachowski said, ‘I am delighted to have this world-class team of experts advising the Commission on this historic undertaking.’ …. The team of auction experts is led by Auctionomics Chairman Paul Milgrom, the Ely Professor of Humanities and Sciences in the Department Economics at Stanford University, and a member of the National Academy of Sciences and the American Academy of Arts and Sciences. Milgrom is the recipient of Nemmers Prize in Economics for contributions dramatically expanding the understanding of the role of information and incentives in a variety of settings, including auctions, the theory of the firm, and oligopolistic markets. He is widely regarded as one of the foremost thinkers in auction theory and design, and he helped create the first FCC spectrum auction design, which has served as a blueprint for similar auctions worldwide.”

Milgrom leads an Auctionomics team that also includes Stanford professors Jonathan Levin and Ilya Segal and University of Maryland professor Lawrence Ausubel.

Mention in the New York Times

September 19, 2011

Paul’s 20-year-old research on incentives was mentioned in an article published on September 19 in the New York Times. According to the article,

Too much pressure to improve students’ test scores can reduce attention to other aspects of the curriculum and discourage cultivation of broader problem-solving skills, also known as “teaching to the test.” The economists Bengt Holmstrom and Paul Milgrom describe the general problem of misaligned incentives in more formal terms – workers who are rewarded only for accomplishment of easily measurable tasks reduce the effort devoted to other tasks.

Mention in Economist Magazine

September 16, 2011

Paul’s work as a bidding adviser is given a nice mention in the September 3, 2011 issue of The Economist magazine. According to the article,

“In the run-up to an online auction in 2006 of radio-spectrum licences by America’s Federal Communications Commission, Paul Milgrom, a consultant and Stanford University professor, customised his game-theory software to assist a consortium of bidders. The result was a triumph.

When the auction began, Dr Milgrom’s software tracked competitors’ bids to estimate their budgets for the 1,132 licences on offer. Crucially, the software estimated the secret values bidders placed on specific licences and determined that certain big licences were being overvalued. It directed Dr Milgrom’s clients to obtain a patchwork of smaller, less expensive licences instead. Two of his clients, Time Warner and Comcast, paid about a third less than their competitors for equivalent spectrum, saving almost $1.2 billion.”

The article unfortunately failed to mention that the this consulting project was a joint effort by three Stanford professors. The two others were Jonathan Levin and Jeremy Bulow.

Fishery Auctions in Chile

May 15, 2011

On May 9-10, Paul was in Santiago, Chile to advocate the creation of individual transferable fishing quotas (ITQs) and the use of auctions to assign at least half of them. (Chilean law authorizes auctions only for half of the fishing rights.) The use of auctions would not change the total allowable catch, but would open the door to new entry by more efficient firms. Currently, entry is blockaded by a handful of firms that control all the rights. Not only would auctions enhance efficiency, but they would also capture a portion of the value of fishing rights for the Chilean population, just as radio spectrum auctions have promoted efficiency and captured value in many countries.

El Mercurio newspaper published an interview with Paul on May 10, which can be found here.