A Stylized Model of the German UMTS Auction1

This paper discusses some economic aspects of the recent German and Austrian UMTS license auctions. We consider a stylized model of the open ascending auction with incomplete information and market externalities. It is shown that, if the dominant incumbent is not successful in pushing the weakest entrant out of the market, he will face ex-post spurious price increments. We argue that this feature of the German auction design caused a signi ̄cant risk for the bidding ̄rms. In particular, being aware of these risks, an incumbent may be willing to accommodate the entrant earlier than what one would expect from the valuations alone. We compare our predictions with the observed outcomes. JEL classi ̄cation: D44, H21 1incomplete and preliminary This version: November 2001. First version: October 2000. The authors are grateful to Tilman BÄorgers, Holger MÄ uller and seminar participants in Gerzensee for useful comments. We also thank Mathias Meisel, portfolio manager at Zurich Invest, for insightful discussions about the telecommunications industry. Financial support by the Sonderforschungsbereich 504 is gratefully acknowledged. 2Postal address for correspondence: Ludolfusstr. 5, D-60487 Frankfurt a.M., Germany. E-mail: [email protected]. 3E-mail: [email protected]. 1