How to design an auction

The 3G auction of 2010, held in the wake of the 2G scandal of 2008, was a blessing, for it achieved two objectives critical to emerging market economies such as India: it ensured transparency in the process of allocation of scarce spectrum, and also resulted in revenue maximisation. Because of prevailing spectrum constraints in certain service areas and expectations of a data-led boom, the 3G auction produced healthy bids with the government collecting Rs 67,719 crore, albeit with significant inter-service area variations. Delhi and Mumbai by themselves accounted for 40 per cent of the winning bids. The current 2G auction that ended last Wednesday (November 14) seemingly achieved the transparency objective, but fell way short of the government target of Rs 30,000 crore by a massive 69 per cent.

The less than enthusiastic response from service providers in the current auction is because of the high reserve price set by the government. There were no bids in Delhi, Mumbai, Rajasthan and Karnataka circles. Only in Bihar did the winning bid surpass the reserve price, and that too by just over 9 per cent. That the auction ended in just two days compared to the 35-day bidding for 3G spectrum in 2010 is further proof of the high reserve price.

Economic theory asserts that in a well-designed auction, resources get assigned efficiently to the parties that value them the most, obviating the need to ex ante fix the "market" price. That is the job of the auction and not the administrator. It is worth noting that the Telecom Regulatory Authority of India (TRAI) had recommended a reserve price of Rs 18,000 crore for 5 MHz pan-India 2G spectrum. Questions were raised around the logic of fixing such a high reserve price. This was eventually reduced to Rs 14,000 crore, thanks to the intervention of the Empowered Group of Ministers (EGoM). Clearly, the 23 per cent reduction was not enough, although TRAI could argue that they were simply following the Supreme Court's instruction of conducting a "3G-type" auction. The final reserve price recommended by TRAI was, however, over 8 per cent higher than even the 3G price, reflecting mechanical indexation to arrive at the reserve price.

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