Auction for the 5G spectrum in Chile: more efficiency and transparency

Traditionally in our country, the allocation of the radio spectrum for 4G, 3G and other technologies was carried out through administrative technical processes, or beauty contests, in which the participants presented a technical project that they undertook to carry out and – only if several of them tied – a non-competitive bidding was made, in which, in general, there was a guaranteed block for each participant. As there was little competition, the economic offers were far from optimal and, therefore, the collection in the different auctions was very low.
Thanks to the project led by directors of the Chilean Telecommunications Commission (Subtel) and an Industrial Engineering team from the University of Chile, the suboptimal auctions for this resource will be a thing of the past. The University of Chile team is made up of our academics Juan Escobar, Director of the Millennium Institute of Market Imperfections and Public Policies (MIPP); José Correa, Principal Investigator at the Center for Mathematical Modeling (CMM) and Guest Researcher at MIPP and the Complex Engineering Systems Institute (ISCI), and Rafael Epstein, Senior Researcher at ISCI, in addition to young researchers Natalie Epstein and Yerko Montenegro.

Indeed, in the last bidding process for 5G technology in Chile, completed last February, the amount raised was 453 million dollars. This, the researchers point out, is equivalent to an increase of 512%, or six times, with respect to the 74 million dollars raised in the sum of all spectrum auctions in Chile’s history. “The results allow us to affirm that all the objectives that the regulator set were met.

The contest contemplated three independent auctions: 700 MHz band: 1 block of 20 MHz AWS GHz band: 1 block of 30 MHz 3.5 GHz band: 150 MHz, divided into 15 blocks of 10 MHz. The researchers say that for each of these three auctions, the well-known “first price sealed envelope” auction was used, with the condition that each participant had the obligation to provide service coverage in a similar area of the national territory to that of the previous contests (4G, 3G). For the case of the 3.5 GHz band, on the other hand, a combinatorial type mechanism was implemented (where multiple objects are auctioned and the offers can be for subsets of objects and not necessarily for each one separately), in order to maximize the synergies that could occur between the 15 blocks that were divided into two parts; 10 blocks of 10 MHz in the low part and 5 blocks of 10 MHz in the high part. They explain: “We implemented a closed-type auction that is simpler and minimizes the risks of collusion for a strategic good that is assigned for 30 years. The implemented design allows firms to express their economies of scale, so it naturally encourages participation.”

For the 15 blocks of the 3.5 GHz band, the largest auction, the team of researchers decided to implement a combinatorial mechanism, since the background suggested that different combinations of these blocks had higher value for some companies, while other combinations for others. “This reality led us to recommend the convenience of allowing offers for block “packages”, they comment. Five companies participated in this auction: Borealnet, Claro, Entel, Telefónica and WOM, of which Entel, Movistar and WOM were awarded radio spectrum and the greatest competitive intensity occurred in the 3.5 GHz auction, which confirmed, they say, the advantage of having chosen the combinatorial mechanism. “We hope that this case will serve as an experience to efficiently allocate other public goods so that the private world, based on investment and innovation, achieves their maximum potential,” the researchers conclude.