Appendix C to the Notice of Proposed Rulemaking
Supplement to Appendix C: Auctionomics/Power Auctions Option for Forward Auction (February 1, 2013)

Forward Auction and Assignment

As previously noted, the major rules of an auction can be described in terms of three elements: the bid collection procedure (how bid information is gathered), the assignment procedure (who gets what), and the pricing rule (how bids determine the prices). Our Forward Auction option is an ascending clock auction, an evolution of the format used in past FCC auctions but with several novel features. The auction sells generic licenses, and takes the following general form. (1) There will be a series of rounds, with the FCC announcing prices in each round (the ascending prices are referred to as price “clocks”) for each category of generic licenses in each geographic area, and bidders responding with the quantities of licenses of each type they seek at those prices. These quantities are restricted by certain detailed rules and in addition bidders are able to submit bids at intermediate prices. Generally, prices will rise in a round if there is excess demand for the product in the preceding round or if the closing conditions have not been satisfied. (2) When there is a round with no excess demand for any product, the closing conditions will be checked. (3) When the auction closes, winners pay the final clock prices for each product. Following the completion of the clock auction, there is a separate assignment phase to determine which particular frequencies are to be awarded to particular winners of generic licenses, taking into account the importance of assigning contiguous frequencies to each winner.

Most importantly, the supply of licenses during the auction is not fixed for the entire auction, but may be adjusted as the Clearing Rule attempts to match demand and supply from the Forward and Reverse Auctions.

In addition, the auction design includes several features so that the auction can be run more quickly and in fewer rounds than past FCC auctions that sometimes have taken a month or more to complete. These features, which we describe below, include the use of “generic” licenses, “intra-round” bidding, and a “bid processing” rule that obviates the need to specify provisionally winning bids after rounds in which the aggregate demand for a product exceeds its supply.

For specificity in this Forward Auction design option, we assume that the Products offered for sale will include generic licenses for paired spectrum in each of the 176 Economic Areas (EAs). Generic licenses provide the right to a specific amount of spectrum in a specific area, but not to particular frequencies. The assignment to frequencies is done after the auction. The band plan may also include other Products, such as downlink-only licenses. From a band plan perspective, a key to making this auction run in significantly fewer rounds than an SMRA is that the generic licenses offered in a specific market should be generally “fungible.” That is to say, bidders should not care much about which specific frequencies they are assigned, but rather focus on “where” (geography) and “how much” (number of blocks). As described below, an “assignment round” will convert generic licenses into specific frequency assignments at the end of the auction. When discussing bids in the Forward Auction, “quantity” refers to a number of generic licenses.

The auction proceeds in a series of discrete rounds. At the outset of the auction, bidders express their demands for each Product at the reserve prices. Then, in each subsequent round, the FCC increases the prices of the Products where the Aggregate Demand (the total demand for that product by all bidders in the current round) exceeds the Supply. Bidders may then adjust their demands. This continues until no Products have excess demand, at which point the closing conditions specified by the Clearing Rule are checked. If the closing conditions are satisfied, the auction ends. Otherwise, prices continue to increase for each Product so long as demand for that Product is at least equal to the Supply, and the closing conditions are rechecked after each round. If they are met the auction closes. There may be several additional rounds of this kind until no further price increases are possible without leading to excess supply. At that time since the closing conditions cannot be met at the current provisional clearing target, the provisional target quantities are reduced as described by the Clearing Rule.

The process of price increases and demand adjustment, which we describe below, makes use of “intra-round” bids that are “processed” after each round of bidding. With intra-round bidding, the FCC announces a “start-of-round” price and an “end-of-round” price for each product with excess demand. Each bidder then states how it would like to change its demand as prices rise in this interval. The FCC then processes the intra-round bids sequentially, starting with the lowest bids in the interval, allowing demand changes except when they would cause the Aggregate Demand for a Product to drop below its Supply and freezing the price of any Product in that round at the point where Aggregate Demand becomes equal to Supply. This prevents the auction price from “overshooting” and creating excess supply (resulting in unsold licenses where there had previously been demand for those licenses). As in the traditional FCC design, bidders also must satisfy an Activity Rule that requires them to bid actively in early rounds of the auction in order to maintain the ability to bid in later rounds of the auction.

We now provide a more detailed explanation of the rules.

Description of Rules
Supply

At the outset of the auction, and before each round, the FCC announces the available Supply of each Product.

Initial Prices

The initial prices are minimum prices set by the FCC. Traditionally, the FCC has specified initial prices in SMR auctions using a money amount multiplied by the population of the region associated with the license, sometimes with an adjustment for rural populations. Alternatively, it may use an econometric model to determine relative spectrum values and set the reserves in proportion to those values.

Initial Bids

A bid in the initial round of the auction (Round 0) states a quantity of each Product that the bidder is willing to purchase at the reserve price.

Price Increases

Prior to each Round t ≥ 1, the FCC announces for each Product the amount by which its price may increase during the round. We refer to a Product’s price before the increase as its “start-of-round” price, and its price after the increase as its “end-of-round” price. Prices are increased only for Products where the current Aggregate Demand exceeds the Supply. The size of the price increases may vary during the auction, for instance from 20% at the beginning of the auction to a smaller amount such as 5-10% in later rounds.

Intra-Round Bids

In each round, bidders may submit one or more “intra-round” bids. An intra-round bid specifies how a bidder would like to adjust its demand as prices increase toward their end-of-round levels. For example, a bidder could specify a demand decrease of 1 for Product A at a “price point” of 50%, meaning the bidder wants to reduce its demand for Product A by one unit when all prices have increased 50% of the way from start-of-round to end-of-round levels. Alternatively, or in addition, a bidder could specify a demand decrease of 1 for Product B and a demand increase of 1 for Product C at a price point of 75%. Such a bid would specify a switch of demand from Product B to C when prices have risen 75% of the way from start-of-round to end-of-round levels. An intra-round bid can involve multiple Products or units. A bidder can submit multiple intra-round bids within a round, but at most one bid at each price point.

The idea of intra-round bidding is to approximate a condition in which bidders can adjust their demands while prices rise almost continuously. Relative to the usual FCC rules, it allows a shorter process by having fewer rounds with larger price increments from round to round, without the substantial loss of efficiency. The procedure also provides for a form of “tie-breaking” in case multiple bidders attempt to decrease their demands for a Product in a way that would lead to excess supply.

Activity Rule

The auction includes an Activity Rule similar to past FCC auctions. Before the auction, the FCC assigns each Product a number of points. Bidders also submit deposits that entitle them to a certain amount of bidding Eligibility. During the auction each bidder’s demand, measured in points, is limited by its Eligibility. A bidder’s Eligibility is updated after any demand adjustment and is set equal to the smaller of (1) its prior Eligibility or (2) the total number of points associated with its current demand divided by the Activity Requirement for that round. The FCC sets an initial Activity Requirement (say, 0.75), and may raise it during the auction.

Bid Restrictions

A bidder may not submit a bid that violates the Activity Rule, nor may a bid be withdrawn. In addition to the basic Activity Rule, there is also an “anti-stalling rule” that prohibits bidders from both increasing and decreasing demand for the same Product at different price points in the same round, or from increasing demand for a Product in a round where its price did not change and then reducing demand for the same Product in the next succeeding round.

Bid Processing

After intra-round bids are submitted, they are processed sequentially. The processing mimics what would happen if prices were raised continuously from their start-of-round to end-of-round levels. To achieve this, the intra-round bids are processed starting with the lowest price point and continuing upward. An intra-round bid is allowed so long as the requested demand adjustment(s) do not cause the Aggregate Demand for any Product to fall below the Supply of that Product. If an intra-round bid would cause “overshooting,” it is disallowed and the bidder is held at its prior demand. In this situation, it could happen that, later during the bid processing, another intra-round bid increases the Aggregate Demand for the relevant Product, and then the disallowed bid may be reprocessed. The auction rules will contain a detailed description of this.

Posting of Prices

After the bids from Round t are processed, the FCC determines a posted price for each Product. For any Product that did not have a potential price increase in Round t (because Aggregate Demand was less than Supply), the Posted Price is set equal to the start-of-round price. For any Product where the Aggregate Demand after the round still exceeds the Supply, the Posted Price is set equal to the end-of-round price. Finally, for any Product where the Aggregate Demand fell to exactly the Supply, the Posted Price is set equal to the highest price at which the Aggregate Demand was adjusted down to this level (which could be 25% of the way from the start-of-round price, 73% of the way, etc.). For each Product, the posted price from Round t then becomes the start-of-round price for Round t+1.

Conditional Termination and Supply Adjustment

The Forward Auction continues until there is no excess demand for any Product. At that point, the FCC tests to see whether the closing conditions of the Clearing Rule are satisfied. If not, the prices continue to increase for all licenses for which Aggregate Demand exceeds Supply until either the closing conditions are satisfied or no licenses remain for which Aggregate Demand exceeds Supply. If the closing conditions cannot be met, the provisional spectrum target is then adjusted as specified by the Clearing Rule and the auction continues. The exact adjustment will depend on the Band Plan, as discussed in the previous section.

Information Policy

Before each round, the start-of-round price, the end-of-round price and the Supply for each Product will be announced to each bidder. After each round, the Posted Price, the Aggregate Demand (evaluated using the processed demands for that round) and the bidder’s own processed demand for each Product will be announced to each bidder. No other information about the bidding will be disclosed.

Residue

It may happen, after the auction, that some Products are in excess Supply. This could happen, for example, if certain Products never received sufficient demand. In this case, the final auction rules might call for the FCC to immediately reauction these dditional Licenses or to hold them for later sale.

Assignment Stage

After completion of the Forward Auction, which determines the quantity of each Product allocated to each bidder, the Assignment Stage determines the actual frequencies to be assigned to each bidder in each EA based on the generic licenses won in the auction. The assignment stage ensures that each winning bidder obtains contiguous spectrum within each EA. If the only Product is paired spectrum, winning bidders will be allowed to choose “positions” based on a random priority ordering. If the Forward Auction also includes one or more blocks of downlink-only spectrum, this process can be modified so that at least one winner of downlink-only spectrum obtains this spectrum adjacent to any paired downlink spectrum it has won. The details of the Assignment Stage, however, will depend on the exact Band Plan.

Additional Possible Variations

The following additional possible variations are not currently included in our auction design option for the Forward Auction, but could be incorporated:

Self-Imposed Minimum Quantity

Before bidding begins, a bidder could be permitted to specify a minimum quantity of two units. If the bidder elects this option, it would only be allowed to demand two or more units of Product in any EA, or to demand no units of any Product in that EA. With this variation, an intra-round bid by this bidder that decreased its demand from two to zero and thereby brought the Aggregate Demand for the Product to one less than the Supply would be allowed. However, a bid that brought the Aggregate Demand for a Product to two units less than the Supply (or lower) would be rejected. We point out that, even without this rule, because the intra-round bids are processed as packages, a bidder can ensure that it never acquires a single unit, but can do so only at the cost of continuing to bid for two units as license prices rise.

Package Bidding

The current auction design option does not incorporate any explicit package bidding, although the intra-round bids are processed as package bids, mitigating the so-called “exposure problem,” according to which bidders may win some but not all of a set of complementary items. The Self-Imposed Minimum Quantity would expand package bidding in a limited way (allowing aggregations of at least two units in a given geographic area). An alternative approach would be to allow much more extensive packages, such as those of the combinatorial clock auctions (CCA) proposed for spectrum auctions in a number of European countries, Canada, and Australia, or certain limited packages, such as ones covering all EAs in a larger geographic grouping.

Alternative Activity Rules

The current auction design option includes a “pointsbased” activity rule that is similar to past FCC auctions. An alternative approach has been proposed for use in recent Combinatorial Clock Auctions, in which the activity rule permits bids if either they satisfy a 100% eligibility rule or if they satisfy a revealed-preference constraint with respect to prior bids.

Assignment Stage

The current auction design option includes a particular assignment procedure, in which winning bidders are randomly assigned priorities and then pick contiguous frequencies. An alternative approach would have winners of generic spectrum bid for the various positions.