Efficient Allocation of Radio Spectrum

• Author: BENOÎT PIERRE FREYENS,CHRIS JONES
• Date: 01 February 2014
• DOI: http://doi.org/10.1111/jpet.12045
• Published date: 01 February 2014

EFFICIENT ALLOCATION OF RADIO SPECTRUM

BENOˆ

IT PIERRE FREYENS

University of Canberra

CHRIS JONES

Australian National University

Abstract

Legislative reforms in Anglo-American countries require

governments to account for efficient spectrum usage subject

to interference control. New spectrum governance regimes

promote flexible and competitive usage but the broadcast-

ing industry remains exempt from reforms, at a significant

cost to society. The need to liberalize broadcast spectrum

cannot be overstated, but how should we select among alter-

native deregulatory regimes? In a simple stylized model we

formalize the welfare effects of allocating licenses for using

bandwidth on broadcast spectrum. We provide optimality

conditions for entry, spectrum usage, and congestion levels

under different market conditions, which allows us to justify

the selection of specific governance arrangements.

1. Introduction

The efficient usage of high-value very high frequency (VHF) and ultra

high frequency (UHF) broadcast spectrum is one of the most contentious

Benoˆ

ıt Pierre Freyens, Faculty of Business, Government and Law, University of Canberra,

ACT-2601, Australia (ben.freyens@canberra.edu.au). Chris Jones, Research School of

Economics, The Australian National University, Canberra ACT-0200, Australia.

The paper benefited from discussions with (or helpful comments from) Geoffrey Bren-

nan, Gerald Faulhaber, Martin Peitz, Martin Richardson, and participants at the 4th In-

ternational Telecommunications Society (ITS) AAA conference and at the 1st conference

of the Network for Economics Research on Electronic Communications (NEREC). The

inspiration for this paper proceeds from a longstanding collaboration between one of the

authors and the Australian Communications and Media Authority, and we are grateful to

Mark Loney and Michael Poole for numerous conversations about the role and meaning

of efficiency in spectrum allocation policy. However, the views and interpretations pre-

sented here are the authors’ own and should not be assumed to represent those of ACMA

or of the persons mentioned above. We also thank the editor,an associate editor, and two

anonymous referees for comments that improved the paper.

Received August 23, 2010; Accepted October 12, 2011.

C2013 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 16 (1), 2014, pp. 1–23. 1

2 Journal of Public Economic Theory

contemporary issues in radiocommunications policy. Everywhere, govern-

ments allocate radio spectrum to broadcasting services by regulatory fiat,

and regulatory agencies subsequently manage the frequency bands and as-

sociated equipment standards with considerable discretion. Typically, this

command and control allocation model, at times referred to as “equity al-

location,”1rewards the politically savvy within the regulated industry and en-

courages spectrum hoarding well beyond what is economically desirable. For

decades, hundreds of MHz of prime “beachfront” radio spectrum have been

entrusted in this fashion to an industry which needs (and indeed uses) far

less. In practice, this restrictive allocation model guarantees minimal inter-

ference to broadcasters by imposing large buffer zones (white spaces) be-

tween contiguous bands, effectively trading the number of users (and alter-

native services) for small technical gains in incumbents’ quality of service.

In his most recent critique of the broadcasting allocation regime

Thomas Hazlett reiterates this point by emphasizing that “trade-offs be-

tween the cost of ‘harmful interference’ in one application and the

benefits of additional activities in another should be perceived as eco-

nomic values, not engineering parameters” (Hazlett 2008a). A logical

consequence of intolerance for interference and use of discretionary li-

censing is that competitive entry by other broadcasters has been ar-

bitrarily blocked for decades. Generations of economists have stressed

the economic cost of using a control and command approach to al-

locate VHF and UHF radio spectrum—especially in view of the in-

creasing economic value of the bands (Coase 1959,1966,Levin1966,

Minasian 1975, Levin 1980, McLauchlan and Westerberg 1982, Hazlett 1990,

Faulhaber 2006,Hazlett2008a). In spite of these controversies, equity al-

location of broadcast spectrum has proved remarkably resilient over time.

Yet the coming of age of digital TV and digital radio technologies offers

clear opportunities to break with the past and experiment with more flex-

ible and market-responsive spectrum management methods. The matter

that still needs to be resolved is determining the appropriate governance

regimes and the criteria that will guide their selection. There are differ-

ent views about the economic benefits of adopting specific governance ar-

rangements due to the range of choices being made, including entry levels,

equipment standards, and the extent of property rights conferred with band-

width allocations. The ITU (2007), Pogorel (2007), The CEPT (2009), and

Freyens (2009) provide a comprehensive account of the policy choices under

consideration.

At the heart of this debate lies the matter of interference manage-

ment, which is often misunderstood in the wider public. In a high-demand

spectrum environment, such as the broadcasting bands, all transmissions in

adjacent bands ineluctably cause some degree of interference. Where do

1See McLauchlan and Westerberg (1982) and Hazlett (2008a).