USF Reverse Auction is Cost-Effective Success

USF Reverse Auction is Cost-Effective Success

Wallsten Praises Novel Approach, Suggests Auction Improvements

Contact: Amy Smorodin
(202) 828-4405

April 5, 2013 – The Federal Communication Commission’s recent Mobility Fund Phase 1 Auction should be considered a “qualified success,” illustrating that reverse auctions and cost-effectiveness measures can be efficient ways to distribute Universal Service subsidies, explains Scott Wallsten in “Two Cheers for the FCC’s Mobility Fund Reverse Auction,” released today by the Technology Policy Institute. However, in order to address possible issues with future reverse auctions, the Commission should consider analyzing auction eligibility requirements, how it evaluates bids, and using different auction designs to discourage strategic bidding.

Wallsten, Vice President for Research and Senior Fellow, notes that the fund subsidized mobile coverage over 83,000 road miles, but “[b]ased on bids received in areas that were ultimately not awarded funding, covering the next 1,924 miles would have required an additional $144 million in subsidies.” This outcome highlights the inefficiency of the typical approach of providing universal service subsidies in all eligible areas regardless of cost-effectiveness.

Wallsten also finds that auction competition significantly reduces expenditures. Because it was a national auction, all bidders faced competition. However, only 28 of the 795 areas that won subsidies had two or more bidders. While the expected profitability of a given area affects bids, his research reveals that “bidding competition itself also resulted in lower subsidies.”

The author also identifies issues the FCC should consider in future reverse auctions. Wallsten urges the Commission to analyze whether evaluating bids based on subsidy requested per road mile covered, as it did in this auction, is truly superior to alternative methods, such as subsidy requested per population covered. In addition, he advises the FCC to consider whether excluding areas from auctions because an incumbent has planned, but does not yet offer, service may affect participation and provide incumbents a de facto right to receive a subsidy. Finally, Wallsten warns of possible strategic bidding in future auctions due to the “pay-as-bid” feature of the auction. He urges the FCC to “consider employing other mechanisms more likely to induce firms to reveal their true estimates of the subsidies necessary to provide service.”

Wallsten suggests the FCC also consider issues not addressed specifically through auction design, such as barriers to participation. For example, because spectrum access was a requirement for auction participation, policies governing availability of spectrum and secondary spectrum markets may have affected the pool of auction applications.

“Hopefully,” Wallsten concludes, “this experience with reverse auctions will signal to the FCC the waste inherent in traditional funding mechanisms and spur additional novel approaches to bring more rational funding mechanisms to the program.”

Two Cheers for the FCC’s Mobility Fund Reverse Auction” is available on the TPI website.

The Technology Policy Institute

The Technology Policy Institute is a non-profit research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org.

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