Explain the issue that the article discusses. Guiding questions: How is it related to the dynamic/static trade-off? What are possible solutions? Why is the article discussing rounding bids? Is the phenomenon that the article discusses unique to combinatorial auctions?
FINANCE AND ECONOMICS Learning to play the game American economists said that auctions would be the most efficient way to go after specific licences in subsequent allocate the radio spectrum. But was the bidding rigged? rounds by bidding odd amounts ending with the area codes of the cities it coveted. ECONOMISTS are forever theorising ECONOMICS FOCUS Mercury says that this was a "prudent C about how the world might be run application of bidding strategy, rather more efficiently. Three years ago, the than collusion". American government finally let them Each sale involves multiple rounds of Signalling is apparently not a new put their theories to the test. Congress di- bidding, Bids, which are made by com- problem. The roc was informed that it fected the Federal Communications puter, are sealed during each round, and was taking place shortly after the second Commission (rock. America's telecoms the identity of bidders is concealed to pre- spectrum auction, in July 1994. At the ency, to scrap its practice of weighing vent-in theory at least-collusion. At the time. the roc was advised by game theo- who most deserves to use a given piece of end of each round all bids for all frequent rists that it could prevent signalling by the radio spectrum. Instead, the FCC Was cies are revealed, so that participants can fall bids before they told to auction frequencies for services plot their move in the following round. If are announced (so a bid of $1100,415 Sig such as mobile phones. This was expe a bidder judges that the prices offered for naling that a participant was intent on to achieve two goals at once. First, the go a frequency in, say. Denver have become winning a San Francisco licence, would erment would get money for the right to too high. in the following round it is free be reported as $1Im) The commission in use a scarce public resource. Second, ca to bid for Atlanta and ignore Denver alto nored this advice. Why? One reason may frequency would be used in the most p be that attempts to warn off rivals by sig ductive way, because the company that nalling can backfire, leading to more in could best employ it would offer the high- tense bidding that could drive up the go est bid. The concept is so compelling that emnment's take. Now, the Foc says that in Britain's new government this week pro- the future reported bids will be rounded. posed spectrum auctions too. Spectrum auctions have provided full Sending a message Employment for America's microecono- That may not stop signalling altogether. mists and game theorists. The roc's con- however. In one carly auction, a big bid- sultants carefully designed auction rules der apparently signalled its aggressive in- that would maximise the government's tent by entering two bids for a particular revenue. Telecoms companies hired retion's licences in the first round. Its cams of experts to map out bidding strat- competitors got the message, and it won ries. The procedure seemed to be a roar- the licences without much of a batt ing success. In 14 different au Were the low bids achieved in the 1994. the FCC has attracted winning bids FCC's April auction, in which licences for worth $23 billion. But suddenly it has all cities such as Minneapolis-St Paul and gone wrong. An auction last month of fre- Des Moines, lowa, went for $1 each, the quencies suitable for wireless data trans result of collusion? The FCC, with some mission, which was expected to raise $LS ustification, says that the auction billion, produced only $136m. Worse, the lopped because a cash-hungry Congress Department of Justice is investigating Let me work that through again ordered it rushed. Some game theorists, whether bidding has been rigged. however, claim that collusion has oc- could a bidding procedure gether. The bidding continues, round af- curred in several spectrum auctions, an crafted by leading experts in game theory ter round, until there are no new bids for has proved especially effective where few ead to bid-rigging? The answer is not at any of the frequencies on offer. bidders took part. That description fits all clear. But it appears that some deci- Game theorists thought this complex the April sale, in which a mere 17 bidders sions made in designing the auctions process perfect for an industry in which napped up the 126 licences on offer. may have made them susceptible to collaboration among bidders (enabling The surest way to end bid-signalling manipulation. In short, bidders may have each, for example, to win a block of li- would be to scrap the simultaneous mul- turned out to be better game theorists cences for contiguous areas rather than a tiple-round auction and go to an old fash- han the FCC less valuable scattering of licences across oned sealed-bid auction instead. But a The sales technique adopted by the the country) might be a temptation. The switch to closed bidding might well make FCC involves what is known as simulta only snag is that this auction method had bidders more cautious: to avoid win- multiple round auctioning A never been tested except in laboratory ex- ner's curse"-the tendency to bid too high given sale might involve, say, frequencies periments. Just as game theorists would in order to be sure of winning-bidders in suitable for paging systems. Frequencies expect, bidders seem to have learned how scaled-bid auctions normally discount for various cities are sold simultaneously. to use the rules to their advantage. their estimates of the object's worth. That Bidders must register in advance, stating In a complaint to the FCC. High Plains might, in the end, leave the government which frequencies they may wish to bid Wireless, a Texan firm, claims that Mer- with less revenue than the multiple- for. Bidders are strictly prohibited from cury rcs, a rival for licences in Texas, round auctions have delivered. The gam co-operating collaborating, discussing "warned off" High Plains from bidding theorists may not have devised the perfect or disclosing the substance of their bids or against it in a January 1997 auction. Mer- way of allocating the radio spectrum, but bidding strategies". cury allegedly "signalled" its intention to for all its flaws, it may still be the best one
