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The Power of Market Design

Misallocation of scarce resources too often deprives users of them even as others waste their supply. Well-designed markets can overcome such problems by enabling voluntary transactions that allow existing users to retain their allotments while enabling higher-value uses.

STANFORD – In 2010, the United States faced a challenging allocation problem. Demand was surging for a resource vital to daily life, but the available supply was being used by incumbents that had built an important industry around it. Moreover, incremental transfers to new uses were impossible. Could new rules alleviate growing scarcities while respecting existing users’ rights and enabling a voluntary, multi-party reallocation?

The resource was not water but radio spectrum – the electromagnetic frequencies used for wireless phone calls, smartphone data, and emergency communications. Demand for spectrum had grown as more people streamed movies, placed video calls, and used mobile apps. But because spectrum that would have been ideal for smartphone apps was taken up by a fragmented industry of TV broadcasters, there wasn’t enough bandwidth for mobile uses.

Our company, Auctionomics, advised the US Congress and Federal Communications Commission to solve the problem through a series of changes culminating in the Broadcast Incentive Auction. Spectrum would be bought back from less-valuable broadcast uses and resold for cellular applications, while generously protecting incumbents who wanted to continue their traditional uses. That auction, held in 2016 and 2017, acquired a large amount of spectrum, reallocated it to higher-value uses, and raised $19 billion in gross revenue.

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