Ownership Concentration and Strategic Supply Reduction∗

We explore ownership concentration as a means to seek rents in the context of the U.S. government’s planned acquisition of broadcast TV licenses in the ongoing incentive auction. We document the significant purchases of licenses by private equity firms in the run-up to this auction and perform a prospective analysis of the effect of firms controlling multiple licenses on the outcome of the auction. Our results show that multi-license holders are able to earn large rents from a supply reduction strategy where they strategically withhold some of their licenses from the auction to drive up the closing price for the remaining licenses they own. Relative to the case where each license is bid into the auction independently, total spectrum acquisition costs increase by 22%, although the increases are concentrated in a small set of markets. Strategic behavior by multi-license holders reduces economic efficiency as the set of licenses surrendered into the auction is not the socially optimal set. A case study illustrates the mechanism in a specific local media market. We propose a partial remedy that mitigates the effect of ownership concentration and reduces the distortion in payouts to broadcast TV license holders by up to 80%. We further show that the impact of lower participation of license holders could greatly increase the base level of payouts and exacerbate strategic effects. ∗We thank Gabbie Nirenburg and Elizabeth Oppong for research assistance and the Penn Wharton Public Policy Initiative and Dean’s Research Funds for financial support. We have benefited from conversations with Ali Hortaçsu, Jonathan Levy, Greg Lewis, Evan Kwerel, and Rakesh Vohra, and several conference and seminar participants. We thank Gavin Burris and Hugh MacMullan for technical assistance. Katja Seim’s participation in the project predated her appointment as FCC Chief Economist. Accordingly the opinions expressed in the paper are those of the authors and do not necessarily represent the positions of the Federal Communications Commission or the U.S. Government. †Wharton School, University of Pennsylvania, Steinberg Hall-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104, USA. E-mail: [email protected]; [email protected]; [email protected]; [email protected].