Auction Aversion

David Warsh reflects on the advances of auction technology and market design since the first high-tech auction was held by the Federal Communications Commission in 1994. Warsh points out that despite the recent growth of auctions in private markets and the well-established benefits of auctions, industry continues to vigorously oppose government auctions. Auctions of landing slots at New York airports, toxic bank assets, and carbon emission permits have all been opposed by industry groups precisely because of their price-discovering power. Warsh, however, is hopeful about the future. “As principles of market design become more thoroughly articulated and widely understood,” he writes, “the sphere of governmental discretion will shrink.” [%comments]

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  1. Craig says:

    What would have been done with the money from the auctions? I bet it wasn’t to be given back to the airlines. I would have set it up so that the airlines received the money back based on the landing rights they had on a set day in the past. That way, there is no net outflow of money from the airlines. This way, at least some of the major airlines would be for it, and once that happens, it is much more likely to pass.

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  2. hmmm... says:

    “have all been opposed by industry groups precisely because of their price-discovering power”

    Well… in all fairness to the industries doing the opposing, it’s also very hard to plan budgets in advance if you have legally mandated costs that you won’t know the costs of until the day they are due!

    As a business owner and operator myself I know how keeping things running can be a knife-edge balancing trick. If I had a regulatory fee that I was going to have in mid-year that could vary in cost by an order of magnitude it would be chaos. It would just about guarantee poor performance.

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  3. Harold Feld says:

    I’ve been involved in a fair amount of debate around spectrum auctions and will make the following observations.

    1) I highly advise that anyone interested in auction theory start with Paul Klemperer, particularly his work on “auction markets”.

    2) Auctions are not the free market nirvana their supporters believe. They have their uses, but — particularly in repeat auctions involving he same players over multiple auctions — they produce results that reenforce the structure of the existing market. Why? Because incumbents with customers can extract value from the asset more easily than a new entrant. The auction model also assumes that the ability to extract value from the asset is (a) reflected in the ability/willingness to pay more, and (b) this is the “highest/best use” from a policy perspective. The history of auctions shows that both these propositions are suspect.

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  4. frankenduf says:

    so Warsh is hopeful that “the sphere of governmental discretion will shrink”- what planet does he live on?- because on earth, there’s a worlwide recession due to market indiscretion/ lack of governmental oversight

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  5. Maurits says:

    Aren’t auctions opposed because they reduce/eliminate the economic rents available for the operators? Then it makes perfect sense for operators to be against them (and for aeveryone else to be in favour).

    #3′s arguments suggest the opposite: as incumbents have a big advantage, they should be the ones in favour of auctions.

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  6. Harold Feld says:

    Maurits:

    The _introduction_ of auctions is potentially disruptive, and requires incumbents to pay for something they have previously gotten for free. So they resist the initial introduction of auctions. Following the establishment of a stable game, the incumbents become very pro-auction. This is the dynamic we have seen in FCC spectrum auctions, which is the basis of Warsh’s piece.

    I also recommend a piece by Greg Rose and Mark Lloyd, published by the Center for American Progress back in 2006, analyzing ten years of spectrum auctions. http://www.wetmachine.com/totsf/item/576

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