Economic and policy implications of spectrum license fee payment methods


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Economicandpolicyimplicationsofspectrumlicensefeepayment
Contentslistsavailableat
www.elsevierbusinessandmanagement.com/locate/telpol
TelecommunicationsPolicy
ARTICLEINPRESS
0308-5961/$-seefrontmatter
2009ElsevierLtd.Allrightsreserved.
doi:10.1016/j.telpol.2009.09.002
TelecommunicationsPolicy34(2010)175…184
questionnaire,10optedfornoeffectsonconsumerprices,threechosepricefalls,and“vechosepriceincreases.Basedon
thisbriefsurveyresult,
GAO(2005)
asserts,Auctionshavelittletonoimpactonend-userprices.
costofproduction,and,ifthetotalcostofproductionisnotcoveredbytotalrevenue,“rmscannotsurviveinthelongrun.
Noam(1997,1998)and
Gruber(2001)
indicatedtwomorelinkagesthatsupporttheargumentthatspectrumfeescould
ARTICLEINPRESS
ThesaleofabroadcaststationinNewYorkin1926broughtawindfallgainofabout$800,000totheseller,AT&T(
Aitken,1994,p.709
Animplicitassumptionunderlyingthisreasoningprocessisthatthe“rmknowsitsdemandcurve,and,afterpayinglicensefees,the“rmstilldoes
notmakeaneconomicloss.
increaseconsumerprices.Noam(1997,1998)arguedthatauctionswouldworkasagovernmentrevenue-spinningtool,and
Melody(2001)
reportedonthetendency.Inotherwords,governments,pressedbygrowingexpenditure,canhavean
incentivetoutilizeauctionstoextractthemaximumrentfromthespectrumbyreducingspectrumsupplyintentionally.
Gruber(2001)
TR
ð
q
@
q

TC
ð
q
@
q
¼
MR
ð
q
MC
ð
q
0
ð
3
Þ
Once
q
Eq.(4)simplystatesthatthemarginalrevenueproductsoffactorsshouldbeequaltofactorprices.Putdifferently,the
monopolisthiresinputsuntiladditionalrevenuesfromthelastunitsofinputsareequaltotheirprices.However,this
generalstatementmaynotholdforaspectrumbecausetheopportunitycostofslices(channels)ofthespectrumisusually
zero.Theopportunitycostofthespectrumiszerobecausespectrumtradingandusagechangesarenotallowedinmany
countries,andtherearenoalternativeusesforunusedchannels.
Iftheopportunitycostiszero,telecommunication“rms
havenoincentivetousetheirspectrumef“ciently,whichmeansthat“rmschooseaninputmixthatsquandersspectrum
Thesuf“cientconditionforpro“tmaximizationisconcavityofthepro“tfunction(
Varian,1992
Silberberg,1978
morespectrum-intensive,andmoreexpensive,equipmentthantheywouldhaveusedhadtheyrecognizedtheopportunity
costofthespectrum.
0
AC
without spectrum fee
Demand Curve
Fig.1.
The“rst-orderconditionsfromEqs.(7)and(8)areshowninEqs.(9)and(10)andaredifferentfromEq.(3).Different“rst-
orderconditionsmeanthattheoutputofthemonopolistpayingroyaltiesisdifferentfromthatofthemonopolistnot
payingspectrumlicensefees,otherthingsbeingequal.Eq.(9)meansthatMRcurveshiftsdownby
(orMCcurveshifts
upbythesameamount),andEq.(10)meansthatMRcurverotatescounterclockwiseasshownin
Fig.2
Fig.2
illustratesthecasewhere
isconstant,andunitandadvaloremroyaltiesresultinthesamechangein
equilibriumpriceandquantity.Asshownin
Fig.2
,eithertypeofroyaltiesdecreasesoutputfrom
)and
increasesconsumerpricesfrom
).Thedirectionsofchangesintheequilibriumpriceandquantitydonotalter
evenwhentheMCcurveisupwardslopinganddownwardsloping.Royalties,liketaxes,resultinadeadweightloss,caused
AV
AV
Fig.2.
Theeffectsofroyaltyonconsumerprice.
Leland(1978)
þ
q
ð
x
Þ
p
@
q
ð
x
Þ

q
ð
x
Þ
@
x

w
¼
0
ð
14
Þ
ð
1

p
þ
q
ð
x
Þ
p
@
q
ð
x
Þ

ItisobviousfromEqs.(14)and(15)thatroyaltiesdecreasemarginalrevenueby
and(1
)and,inturn,marginal
revenueproducts.Then,factordemandshoulddecreasetocompensateforthereductioninmarginalrevenueproducts.As
factordemanddecreases,marginalrevenueproductsincreasebecausemarginalproductsoffactorsincrease.Areductionin
factordemandisagainthemirrorimageofadecreaseinproductionduetoroyalties.Tosummarize,royaltiesresultinan
underemploymentofproductionfactorsandspectrumunderutilizationinthewirelesstelecommunicationindustry.As
longasthefactordemandofthewirelesstelecommunicationindustryissmall,whencomparedwiththewholefactor
Referto
Schmalensee(1981)
Varian(1989)
,and
Kwon(2006)
fortheeffectsofpricediscriminationonoutputandwelfare.
SebeniusandStan,1982
Table1
Referto
Ure(2003)
forthe“nancialdistressthat3Glicensefeescausedtotelecommunication“rms.
Referto
Kwon(2008)
foranothercauseofsuboptimalinvestmentprobleminthetelecommunicationindustry.
Referto
GarveyandMilbourn(2000)
Rogerson(1997)
withregardtotheuseofpro“tmeasureasanevaluationcriterionofCEOs
pro“tsharingencouragegovernmentstoincreasespectrumsupply.Intermsofgovernmentrevenue,pro“tsharingisthe
best,royaltiesaresecond,andlump-sumfeesarethird.
Noam,E.(1997).Beyondspectrumauctions:Takingthenextsteptoopenspectrumaccess.
TelecommunicationsPolicy
,461…475.
Noam,E.(1998).Spectrumauctions:Yesterdaysheresy,todaysorthodoxy,tomorrowsanachronism.Takingthenextsteptoopenspectrumaccess.
JournalofLawandEconomics
,765…790.
OECD.(2004).

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