Other Auction Types

Package (Combinatorial or Bidding)

54. Package or combinatorial bidding methods can be incorporated into auction design. Package bidding allows participants to place a bid on a group of lots rather than having to bid on each lot in that group. Where there are strong complementarities among the lots and these complementarities vary by bidder,¹¹ this form of bidding is attractive to both participants and the government because:

• participants avoid exposure problems due to not being able to back out of failed aggregations; and
• the government avoids potentially inefficient allocations due to failed aggregations.

55. Issues that are hindering the adoption of package bidding include the following:

• there are many ways and interrelated rules to implement package bidding, and to date theory and experiments provide only limited guidance as to how to design and conduct effective package bidding practice;
• depending on how the package bidding is conducted, there can be a loss in transparency for bidders, and also it may be difficult for bidders to specify their bids;
• the computational difficulties in arriving at an optimal solution (the number of possible combinations equals 2n-1 where n is the number of lots); and
• coordinating bids and the associated free rider problem¹² when used in an ascending auction design.

56. Package bidding has been used in the tender for Fixed Wireless Access spectrum in Nigeria. Here limits were placed on the combinations that could be submitted in order to lessen the computation demands. It was a single round auction so the problem of coordinating bids and the associated free rider problem did not arise. In general, if the allowed combinations are pre-specified and limited in number, or the allowed combinations are logically structured (e.g. nested items), the more straightforward can be the package bidding design. Knowing how strong the complementarities are and how they vary across the bidders may be essential.

57. The FCC introduced a new software system (ISAS) in February 2005 that includes a bidding system that allows for multiple types of auctions (e.g. SAA or SAA with package bidding), however the package bidding feature has yet to be used.

58. In June 2005 the FCC sought input into the design of its economic experiments to examine the performance properties of its designs for conducting simultaneous multiple round auctions of spectrum licenses both with and without combinatorial bidding. Some general comments received included that the Clock or clock proxy auction should be considered and that a closer examination of the threshold problem in relation to smaller participants should occur. The outcome of this process is yet to be published.

Clock Auction

59. In a clock auction, participants indicate their demand at the stated price and the seller adjusts the price monotonically changing until demand equals supply. A clock auction (ascending or descending) is commonly used where one product has been divided into some number of identical units, or multiple products have been divided into some number of identical units (simultaneous clock auction).

60. For simultaneous and single product auctions the clock price mechanism simply replaces the participants' need to submit a price bid, as they now indicate their willingness to purchase in terms of quantity. The seller controls the price until the auction stops when demand equals supply.

61. Controlling the price limits the ability of participants to signal to each other, thereby reducing the possibility of collusion.

62. The clock-proxy auction design developed by Ausubel, Cramton and Milgrom combine the price discovery, simplicity and speed of a clock auction with the efficiency and collusion deterrence of a proxy auction final round. The initial clock phase reveals information to bidders, thus mitigating the winner's curse. The final sealed-bid proxy round entices weaker bidders to enter the auction and helps to preclude certain types of undesirable strategic behaviour.

Comment

63. In theory, package bidding appears to be the most promising change to the SAA as it reduces exposure risk for those seeking to obtain complementary licences, while retaining the ability of participants who see the licences as substitutes to switch from licence to licence. The difficulties outlined in paragraph 55 relate to design and implementation considerations and once addressed package bidding should run smoothly. However, one should not under-estimate the difficulty in practically implementing a package auction whenever more than a handful of lots are being auctioned.

64. Clock and clock proxy designs could be applied where identical lots are being auctioned; however, the introduction of a new method is questionable when the SAA can fulfil a similar function. The applicability of a clock auction in a spectrum context also can be questioned on the grounds that there rarely will be circumstances in which "identical lots" are offered. Even where several technically identical blocks are offered over a geographic area, bidders may not view them as completely substitutable because they would wish to pair a block with its counterpart in other areas, e.g. if I have Block A in Auckland, I also want Block A in Wellington. Also the control of price to limit collusion can be adopted into a SAA design (through the use of "non-discretionary bidding") without the added complication that demand might drop to zero with the change in price.

¹¹ For example, some lots are substitutes for one bidder but are complements for another bidder. Or one bidder strongly prefers one combination of lots while another bidder strongly prefers another combination of lots that overlaps with the first bidder's preferred combination.

¹² The free rider problem in this situation occurs when the standing high bidder has placed a package bid and one or more of the other participant(s) interested in the licences rely on others to increase their bids to dislodge them.