3g Spectrum Auction in India

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SPECIAL ARTICLE

3G Spectrum Auctions in India: A Critical Appraisal
Alok Kumar

That auction should be a preferred route to allocate scarce resources such as spectrum is conditional upon getting the auction design right. We analyse the auction design employed in the spectrum allocation for third generation and broadband wireless access services, assessing its success on the parameters of revenue realisation, efficiency, post-auction market structure, and impact on consumers. While the auction has been successful in mobilising revenue for the government, and has created little adverse impact for the consumers by maintaining the level of competitiveness in the mobile services market, these gains seem to have been offset by the loss in efficiency as well as a higher complexity of bidding strategies. In making the Lowest Accepted Bid a preferred pricing rule, the government accorded primacy to revenue realisation over maximising allocational efficiencies. Thus we propose alternative design elements which would have served the stated objective of enhancing allocational efficiencies better.

1 Introduction
n May 2010, the government concluded its auctions to award licences for the spectrum enabling roll-out of the third generation (3G) and broadband wireless access (BWA) services in the 22 telecom circles across the country. The use of auctions to enhance the allocative efficiency of a scarce resource such as telecom spectrum is indisputable. However, the desired efficiencies cannot be realised unless the auction design and spectrum management policies are both optimal. The Indian market for mobile telecom services is one of the fastest growing in the world. Prior to the conduct of the 3G and BWA auctions, the national subscriber base for mobile telephone services was reported to be 584 million (TRAI 2010) and had been growing at an astounding rate of over 17 million new subscribers every month. Simultaneously, the telecom policy has engendered strong competition among the incumbent telecom operators vying for market shares. This has led to consistently decreasing prices for mobile services, so that consumers here enjoy the cheapest call rates in the world. That said, however, it is also important to note that despite such a huge subscriber base, the penetration of mobile services is only 52.7% as on 31 March 2010, implying a significant scope for further enhancement. Compounding matters is the highly uneven teledensity varying from a high of 128.20 in the urban areas to a low of 26.43 in rural areas. On the one hand, this has led to poor quality of service, particularly in dense urban agglomerations in part due to lack of adequate spectrum. On the other, financial non-viability in sparsely populated rural areas has resulted in an inability to universalise the availability of service to all households. Hence the policy challenge is to ensure availability of spectrum1 while at the same time ensuring that services remain affordable for the highly price-sensitive consumers. As Jain (2001: 671) has pointed out: From a regulatory and policy perspective, spectrum auctions ensure the efficient use of spectrum by allocating it to those entities that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes due to unanticipated problems with their design leading to unexpected bidder behaviour such as collusion and over-bidding. The key challenge before regulatory agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders can effectively use the spectrum for their business.

I

I would like to thank Robert S Willig for helpful suggestions while finalising the paper, J S Deepak for discussions and Amarjeet Singh Dutt for his help in analysing the auction data. Views are personal. Alok Kumar (alok.kumar1@gmail.com) is at the Lal Bahadur Shastri National Academy of Administration, Musoorie. Economic &...
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