Coase and Spectrum Auctions

by on September 3, 2013 at 9:57 am in Economics | Permalink

The Coase theorem was first presented by Coase in his 1959 work on the FCC and allocating radio spectrum (jstor). Radio stations interfered with one another (i.e. externalities). Yet Coase argued that with well-defined property rights, spectrum could be allocated in a market just like other goods. In this talk from our MRUniversity course, Economics of the Media, I discuss spectrum allocation, Coase’s triumph at the Chicago dinner and the much longer time to acceptance and application in the real world of the FCC and spectrum auctions.

1 Donald A. Coffin September 3, 2013 at 10:41 am

“Coase argued that with well-defined property rights, spectrum could be allocated in a market just like other goods. ”

And if transactions costs were zero, or very low.

2 ThomasH September 3, 2013 at 11:09 am

Perhaps one reason for the lack of acceptance of Coase’s idea is that the presentation — Alex’s presentation is an an example — displays a massive disinterest in the distributional implications of the “assignment” of property rights to hitherto unassigned goods.

3 JWatts September 3, 2013 at 11:34 am

displays a massive disinterest in the distributional implications of the “assignment” of property rights to hitherto unassigned goods.

I’m not at all convinced this is important. Clearly society as a whole, represented by the Federal government gains in the original auction. Furthermore, the Federal government continues to gain in perpetuity through taxes on profits. Essentially, societies profits are locked in at the front end.

4 Jeff September 3, 2013 at 11:45 am

Actually starting at 4:37 Alex does talk about the distributional implications of assignment of property rights to unassigned goods and how Johnson took advantage of such.

5 charlie September 3, 2013 at 11:47 am

Spectrum allocation — the last refuge of the scoundrel.

“Furthermore, the Federal government continues to gain in perpetuity through taxes on profits”

Yeah.. ask vodaphone about that.

6 Joe_Beer September 3, 2013 at 1:22 pm

Ahh…the recurring Coase thing. My impression is that Coase made the case that when transactions costs are negligible, the initial assignment of property rights is irrelevant to the ultimate allocation of resources but important to initiating bargaining. When transactions costs are positive and non-negligible the initial allocation of rights is important, it does affect the ultimate allocation of resources, and it may be inefficient. For policy this translates to: when transactions costs are negligible don’t spend a lot of time niggling over the assignment of property rights, just assign them and get on with it…but when they are non-negligible…well, think pretty hard first. Does this comport w/ the professor’s interpretation?

7 errorr September 3, 2013 at 4:04 pm

Interesting that the most innovation has taken place on the unlicensed spectrum reserved for things like microwave ovens (wifi). The problem is that treating spectrum like property is that the ranges of frequency are unique in their ability to propagate through mass. A lot is also reserved for radio astronomy.

Ultimately frequency ownership ends up more like a patent monopoly as it is a scarce limited resource and there are only limited allocations that can meaningfully compete.

Verizon paid a premium for the best band available for their LTE network and AT&T was left with frequency that is much harder to operate as it isn’t the same in every region of the US. That is why in some major cities AT&T LTE is significantly slower. Also the purchase of some unique bands have left all the other carriers with an inability to compete as AT&T has refused to invest in frequencies they own that can also be used by third parties.

The crux of the issue is that property rights are good except when they limit competition like patents. I’m not sure Coase was right about spectrum ownership.

8 AADL September 3, 2013 at 4:09 pm

A patent is not a property right. It’s a government-granted monopoly, or a crookopoly.

9 Robert September 3, 2013 at 7:34 pm

Au contraire. A patent IS a property right of the patent holder. The government does not grant a patent, it SECURES it through the rule of law. Carry on…

10 Ray Lopez September 4, 2013 at 12:27 am

That’s correct. And contrary to layperson belief, a patent does not give you the ‘right’ to practice your invention, but the right to sue others not to practice your invention. A vital distinction, since it costs money to go to trial and sue others (typically at least close to a million dollars for any decent shot across the bow of an infringer). Costly litigation is a fact this is exploited in the reverse by patent trolls.

We need more and better patent laws. Even Alex T agrees in a private email to me.

11 Andrew M September 4, 2013 at 4:20 am

Coase made a mistake in advocating the sale of spectrum rights. The U.S. is one of the few countries where permanent spectrum licenses are sold; in most of the rest of the world, spectrum is leased for 15 or 20 years. This allows the government to profit by selling a new lease every couple of decades.

Advances in technology have massively increased the utility of wireless communications. By selling off prime spectrum in the early years of wireless technology, the Federal government has foregone a revenue stream of hundreds of millions of dollars annually.

12 Margaret September 4, 2013 at 5:37 am

The first auction for radio spectrum was held in 1991 in New Zealand. It was the first in the world and a considerable success.

13 bob September 4, 2013 at 1:32 pm

My difficulty with sales other than leases is the difficulty of taxation. If I buy land, and it becomes very valuable, I can’t hide its value, and it will be taxed appropriately. A tax provides an active incentive to upgrade or sell the underused resource.

An important difficulty is that spectrum is far more scarce than land: If I can’t pay for land in Manhattan, I can cross the river and get an acceptable replacement for most uses. In comparison, look for spectrum that allows you to transfer data for 3 miles at about a gigabit per second. Property rights would probably be a lot less useful if the smallest property anyone could buy was the size of Texas.

So, given that spectrum is very valuable, but hard to break apart into small pieces, drastic misuse is much harder to curb, and much more harmful to society, than someone that wants to plant 5 acres of corn in Manhattan.

So the question is, what can we do to allow the market to work as best as it can? I for one see the point of leases, if made long enough to make sure that by the end of the lease, the original use was probably obsolete. We don’t want to repeat the big waste of the old analog television spectrum.

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