Minister of Communications A. Raja, in a letter to the PMO, has ruled out auctions as a mechanism for spectrum allocation. According to him, auctions are “unfair, discriminatory, arbitrary and capricious”. By ruling out auctions, he has implicitly endorsed the existing spectrum allocation policy that bundles spectrum with telecom service licence. In this purely administrative mechanism of allocation after a licence has been granted, spectrum allocation is then linked to subscriber numbers and not actual usage. Operators pay an administrative price for this allocation. The allocation of spectrum through fiat is referred to as “beauty contests” in auction theory.

However, bundling the spectrum with a service licence is an inefficient arrangement. Radio spectrum is a scarce and essential input for telecom services. It’s important to ensure that spectrum assignment adapts to changing demands and reflects the value of alternative uses. It seems self-evident that if users do not face the true value for the use of a resource such as spectrum, then they have little incentive to adopt economically efficient technology or allocate spectrum to highest value users.

To allow for a fair, non-discriminatory and non-arbitrary allocation, economists since the time of Ronal Coase (1959) have been advocating auctioning radio spectrum. A “well-designed” auction is most likely to allocate resources to those who value it the most. Rather than relying on bureaucrats to assess the merits of competing telecom operators, an auction forces operators to put their “money where their mouth is”. An auction can extract and use information that is otherwise unavailable. The credibility of offers made for spectrum by various companies can be tested only in a proper auction.

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