Spectrum auctions, pricing and network expansion in wireless telecommunications

Abstract

This paper examines the effects of licensing conditions, in particular of spectrum fees, on the pricing and diffusion of mobile communications services. Seemingly exorbitant sums paid for 3G licenses in the UK, Germany in 2000 and similarly high fees paid by U.S. carriers in the re-auctioning of PCS licenses early in 2001 raised concerns as to the impacts of the market entry regime on the mobile communications market. The evidence from the GSM and PCS markets reviewed in this paper suggests that market entry fees do indeed influence the subsequent development of the market. We discuss three potential transmission channels by which license fees can influence the price and quantity of service sold in a wireless market: an increase in average cost, an increase in incremental costs, and impacts of sunk costs on the emerging market structure. From this conceptual debate, an empirical model is developed and tested using cross-sectional data for the residential mobile voice market. We utilize a structural equation approach, modeling the supply and demand relationships subject to the constraint that supply equals demand. The results confirm the existence of a positive effect of license fees on the cost of supply. However, we also find that higher market concentration has a positive effect on the overall supply in the market, perhaps supporting a Schumpeterian view that a certain degree of market concentration facilitates efficiency.