Efficiency gains from using a market approach to spectrum management

This paper is concerned with the merits of employing market forces to address the issues of wireless spectrum congestion and the allocation of spectrum between firms seeking licensed and unlicensed spectrum rights. We show that when unlicensed spectrum is assigned to all competing users during periods of excess demand an inefficient outcome related to the ‘‘Tragedy of the Commons” is likely to result. This inefficiency can be substantially reduced when the assignment of users to unlicensed spectrum is based on the bandwidth and latency tolerance needs of the competing users. Further efficiency gains can also occur when users are required to bid to have their ‘‘unlicensed spectrum” needs met in the presence of congestion. The paper also examines the merits of creating an auction based market in which firms providing spectrum based services to users bid to have their ‘‘spectrum regime” needs satisfied. The objective of this approach is to reduce the incentive that service operators have to misstate their expressed value for a given license regime. The efficiency of this approach is based in large part on the auction mechanism’s ability to solve a ‘‘collective action problem” in which firms desiring unlicensed spectrum have an incentive to ‘‘free-ride” on the bidding behavior of other unlicensed firms. Together our results open up the possibility that a wide variety of spectrum policy issues may be efficiently solved using a market-based approach. They further suggest that there may be a ‘‘hybrid” regime that combines the best features of the license and unlicensed regimes and, thus, lead to a more efficient use of spectrum at any moment in time. 2009 Published by Elsevier B.V.