Centre de Referència en Economia Analítica

It is often alleged that high auction prices inhibit service deployment. We investigate this claim under the extreme case of financially constrained bidders. If demand is just slightly elastic, auctions maximize consumer surplus if consumer surplus is a convex function of quantity (a common assumption), or if consumer surplus is concave and the proportion of expenditure spent on deployment is greater than one over the elasticity of demand. The latter condition appears to be true for most of the large telecom auctions in the US and Europe. Thus, even if high auction prices inhibit service deployment, auctions appear to be optimal from the consumers' point of view. Correspondence to: R. Preston McAfee, 228-77 Caltech, Pasadena, CA 91125, USA, [email protected]. Burguet acknowledges partial financial support from CREA and the Spanish Ministry of Education and Science, project SEJ2005-01427. "It is a victory for consumerism and common sense." Etain Doyle, Director of Ireland's regulator ComReg (then Telecommunications Regulation), commenting the decision to award 3G Irish licenses through a "beauty contest".