Valuing Spectrum Allocations

Abstract

Observing trends in which Wi-Fi, Bluetooth and Zigbee have become widely popular, some argue that unlicensed allocations hosting such wireless technologies are increasingly valuable and that administrative spectrum allocations should shift accordingly. We critique this argument both empirically and theoretically.

Asserted bandwidth valuations are problematic due to the lack of market transactions, and hence prices, for spectral inputs. Various value proxies, such as observed for consumers’ use of wireless applications, or bit flows, do not accurately quantify spectrum allocation trade-offs. Possibilities for input substitution are typically ignored, as are rival opportunities, in favor of categorical claims misaligned with the necessary cost-benefit criteria. The value of the marginal product (VMP) of a given spectrum allocation is assumed to equal the gains of the applications it hosts. The outcome is vividly seen in what we deem the Broadcast TV Spectrum Valuation Fallacy – the idea that because certain wireless services or content are popular, TV channels are efficiently defined. This approach has been rejected, appropriately, in claims for patent licensing fees in intellectual property cases. This logic nicely explains errors in spectrum valuations, as well.

More deeply, while traditional “command and control” allocations have garnered widespread criticism by policy makers, and flexible-use spectrum access rights have gained favor, the regulatory methods used to allocate (or reallocate) bandwidth remain embedded in a “command and control” process. Reconfiguring spectrum usage to enable emerging wireless markets often requires lengthy, costly rule makings. The expense of this administrative overhead is generally omitted from spectrum allocation policy analysis. Yet, it constitutes an essential component of the consumer welfare analysis.

We propose a more fulsome policy approach, one that includes not only the appropriate measures of VMP and opportunity cost for rival allocations, but incorporates institutional transaction costs. Instead of regulators attempting to guess how much bandwidth should be allocated to various types of licensed and unlicensed services – and imposing different rules within and across these allocations – a more generic approach is called for. By better enabling spontaneous adjustments to changing consumer demands and technological innovation, spectrum allocations can be more efficiently brought into their most productive social employments.

Keywords: public policy, radio spectrum allocation, wireless technologies, property rights

JEL Classification: L51, L63, L96, O33, Q28