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The Economics of the Digital Society

Edited by Luc Soete and Bas ter Weel

This important book presents a unique body of research into the economics of the digital society. It questions how modern economies have been transformed as a result of digital goods and markets, and explores the policy implications and challenges of this revolution.
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Chapter 5: Radio spectrum fees as determinants of market structure: The consequences of European 3G licensing

Harald Gruber


* Harald Gruber 5.1 INTRODUCTION Market entry in mobile telecommunications is based on a licensing process for scarce spectrum resources. Whereas initially the assignment of licences was based on administrative procedures (e.g. ‘beauty contests’), there is a trend towards market-based mechanisms such as auctions.1 All European countries assigned radio spectrum for the provision of third generation (3G) mobile telecommunications services2 around the years 2000–2001. The licence assignment procedures varied across countries, but the majority made recourse to auctions. Auctions were an innovative method and produced several surprising results – unexpectedly high licence fees were observed in some countries, whereas in others they were far below expectations. Some of these outcomes, especially the disappointing ones, were explained to some degree by differences and inconsistencies in auction design (Klemperer, 2002). But several points still beg an explanation, especially the high licence fees. However, the administrative procedures for licence assignments, such as a beauty contests, also produced disappointing results on several occasions. The economists’ typical argument in favour of an auction revolves around the assertion that it is a market-based mechanism, and hence best to select the agent with the highest willingness to pay. That implicitly would make sure that the most efficient use is made of a scarce public resource. However, the track record emerging from 3G licensing in Europe throws some doubt on whether performance in attracting efficient firms has improved through auctions. For this purpose a close look is taken at the actions of governments and firms in...

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