Introduction

This chapter is devoted to discussing how it is possible to derive a price or valuation of spectrum by means of a calculation rather than by implementing a market process. There are a number of circumstances in which this might be required:

1. • Suppose a mobile operator has been awarded spectrum by an administrative process, such as a beauty contest, in circumstances where access to the spectrum places the operator in a position where it can earn an excess return. The government may want to appropriate some of that excess return as revenue for the state, to finance necessary public expenditure. Charging the operator a fee for access to the spectrum may achieve that end.

2. • Suppose that public bodies have been assigned spectrum in the past, at no cost. As spectrum scarcity has grown, they will be sitting on an asset with valuable alternative uses, yet have little incentive to economize on it and return unneeded amounts for refarming. Requiring them to pay an annual fee may create an incentive to give unused spectrum back.

3. • Suppose the government or regulator intends to conduct an auction for a mobile band, and is concerned that operators may collude in the bidding process to keep prices down. One way of preventing such behavior from reducing revenues too much is to set a reserve price – an amount which the auction has to realize before the spectrum is licensed to the highest bidders. In this case, the government will want to set a price which prevents bidders from colluding but is not so high as to stop the sale.

In all these cases, a price is needed which does not come from implementing a sale process in a marketplace, but is calculated according to a different formula or procedure. It will transpire, from the examples above, there are several ways in which so-called “administrative” (as opposed to “market”) prices can be set, differing in how the components in the price formula are established.