government auctions

government auctions

The Impact and Mechanics of Government Auctions

1. Introduction to Government Auctions

Another reason for auctioning government assets (spelling out different reasons should make clear that auctions not only include items sold to extract surplus) is public choice considerations. Policies that are politically damaging in the short-run (such as increasing taxes or requesting campaign contributions from regulated entities) become easier to implement when the proceeds derive from an auction. A third rationale is information revelation. The alternative sale mechanism, a negotiation between a seller and its desired buyer, could involve dossiers and complex contracts. An auction involves considerably less oversight and control costs. A fourth possibility is to use an auction as a risk-reducing device. Ensuring that prices are equal to or above the highest value to any of the agents involved will lead to portfolio risk reduction for an entity that is inherently carrying a diverse array of public aimed activities. Finally, a fifth way of interpreting auctions that will be explored is the ability to take advantage of price discovery properties.

1. Introduction Governments of the world have sold or sought to sell an enormous number of things through public auctions. Cabinet Secretaries, National Treasurers, and finance ministers frequently headline large auctions and thus garner considerable public and academic attention when they auction major government assets. Governments appear to use auctions for several reasons. The most obvious explanation is to extract revenues from potential buyers. When government budgets are under pressure, the prospect of a large payment from a telecommunications or broadcast license auction enables policymakers to finance government activities without increasing taxes. In the United States, the prospect of substantial revenues from auctions of radio frequency spectrum assisted Congress in framing the age of the information superhighway.

2. Types of Government Auctions

Common value auctions arise in a wide array of real-world scenarios. Take, for example, the sale of minerals or timber by the government, over multiple units or divisible resources. The resulting revenues of these goods are uncertain from the bidders’ point of view, as the expense of extracting those resources limits the ultimate net gain. By Feller’s zero-sum game, the values from the highest potential payouts in such auctions are tightly symmetric. It is thus relatively easy to construct simple models of such auctions in order to extract easily interpretable predictions.

The most common form of government auction is the common value auction, where bidders’ valuations are not known for certain, but are dependent on an unobserved common element. Under such circumstances, the question of how the auction outcome in this type of auction differs from a conventional private value setting becomes centrally important. Private value auctions can be modeled as auctions where any element of the revenue to be realized from the auction by the bidders is purely due to the surplus structure from the winning bidders. That is, there is no externality from one’s own or an opponent’s losing bid on another bidder. This encompasses both the case of multiple units and a single unit auction with purely private values.

3. Benefits and Drawbacks of Government Auctions

While the benefits from auctions can be quite high, there are also concerns about their use, particularly related to the design procedure. The primary problem that arises in a government auction is the potential risk of creating a market environment that is quite different from the typical auction market. The basic method for auctioning involves promoting information discovery among bidders, providing a reliable, low-creativity process, offering enforcement of auction structures, maintaining an acceptable level of transaction costs, and ensuring good bidding disclosure policies. With the most desirable scenario established, the concerns about designing the auction process focus on choosing the best auction type and analyzing the different product values and valuation behaviors to avoid a disappointing outcome.

Releasing products in limited quantities through an auction process provides a number of benefits for the seller. Revenue maximization is one of the key features of an auction. It can be the most important consideration when, for example, the government is selling the rights to finite resources. An auction rules out the inconsistencies and fluctuations of other revenue sources that are at least somewhat influenced by tenuous budget allocations. Using an auction for revenue purposes allows the process to effectively ignore the revenue “controversy,” because extracting the greatest income level from the auction will be its ultimate aim. All the considerations put in place to prevent side-payments, noncompetitive behavior, and other “wrinkles” in auction conditions would be overridden by the pursuit of maximum revenue.

4. Key Considerations for Participants in Government Auctions

Understanding the dynamics and consequences of governmental allocations are stepping stones towards an appreciation of a wide variety of economic issues. The auction process is a mechanism employed for providing a favored few with the benefits derived from a variety of governmental allocations. We explore the modes in which such an outcome can occur with the objective of providing a better understanding of the ways in which alternative allocation instruments can be utilized, and the implications that arise under the various operational alternatives. Participants in regulatory proceedings and other types of allocation decisions can utilize auction insights in a strategic manner in order to achieve their favored positions. In these applications, well-defined incentives can serve to condition the responses of the regulatory agency or other policy-formulating agency so as to achieve relatively better or worse conditions depending upon the actual and perceived magnitude of its inherent interest in obtaining particular results.

Valuable government goods or services are inevitably an incident of governmental action. It is readily manifest that the decisions that a government makes regarding the allocation of instruments of power and decision have substantial possibilities for significantly impacting the overall pursuit of its perceived functions. It is equally clear that the consequences of a given allocation posture will vary across the various interests that are involved, and further, that those awarded the benefits of governmental allocations will be inclined to promote the stability of their positions. On the other hand, potential beneficiaries who are denied access will be inclined to react in such a manner as to seek revision of status quo allocations.

5. Case Studies and Examples of Successful Government Auctions

Although we focus on government auctions for the dissemination of spectrum licenses during transformation, the mentioned auction of FCC design rights in spectrum. This auction occurred in only two places in the U.S., one being New York City where the winners included 191 sons, Kebble logistics, and Nextel Broadband. It appears that the incumbent MCI initiatives are used to relocate the spectrum to make it less expensive to release to open carriers and the clear guest for which the deletion of the spectrum was taken. Meetings also threatened some units to be sold at the wireless spectrum asset in Manhattan because of the technology adopted UMTS, had been converted into rights to the series and the proposal that the call number of almost four million not join the auction. Governments are also experimenting with certain changes in one auctioned market. These changes aroused great controversy and were rejected during some sales where they were debated, such as the auction of the relaxation of the municipal debt securities sold by the United States.

There are countless examples of successful government auctions. Just in the telecommunications sector, the already cited 3G auctions stand out, together with some recent NASA and FCC auctions. Recently, NASA auctioned non-orbital space spectrum for use in aeronautical telemetry and telecommand (AT&T). The spirit of this non-presentation was to not interfere with the market. The seller was successful both in terms of revenues and masks, but now the 4.2–4.4 GHz band appears to be quite scarce. There are several additional recent auctions by the FCC. The 700 MHz band has raised almost U.S. $20 billion, while spectrum in the Advanced Wireless Service (AWS), Broadband Radio Service (BRS), Educational Broadband Service (EBS), and full spectrum won’t be available until these countries do so. Nearly $1.5 billion was raised in the AWS-3 auction.

5.1 Numerous recent auctions: The U.S. government auctions NASA frequencies, and the FCC auctions the 700 MHz band.