Wireless Competition under Spectrum Exhaust

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Table of Contents  I.   Introduction II.  Background III. Cournot Competition under a Capacity Constraint      A. Supply Side      B. Demand Side      C. Equilibrium      D. Jobs and Investment      E. Spectrum Technology      F. The Asymmetric Case      G. Caveats IV. Conclusion 

I. INTRODUCTION

Spectrum is an essential input for providers of mobile wireless voice and data service. Indeed, without spectrum there can be no service at all, and the more spectrum that a provider has, the better the services it can provide. (1) Unfortunately, as Americans continue to consume mammoth amounts of data with their smartphones and tablets, the united States is rapidly exhausting the capacity available from the existing supply of viable commercial spectrum. The National Broadband Plan, released in 2010, concluded that the present inventory of commercial spectrum represents "just a fraction of the amount that will be necessary to match growing demand." (2) Echoing that concern, Federal Communications Commission ("FCC") Chairman Julius Genachowski cautioned, "[w]ithout action, demand for spectrum will soon outstrip supply.... If we don't tackle the spectrum crunch now, network congestion will grow, and consumer frustration will grow with it." (3) The White House is also concerned, concluding that there is a "spectrum crunch that will hinder future innovation." (4)

As a result, both the FCC and the White House express the need "to free up [more] spectrum" and make it available for broadband use. (5) The National Broadband Plan called for the assignment of an additional 500 Megahertz ("MHz") of spectrum for broadband use, a portion of which is expected to come from spectrum currently used for broadcast television and a portion to be reallocated from government use. (6) Many praised the FCC's plan to increase the stock of spectrum for mobile broadband services, and a report by the National Telecommunications and Information Administration ("NTIA") outlined some ideas for this significant reallocation of spectrum. (7) To help facilitate the reallocation of spectrum, this past February, President Obama signed into law the Middle Class Tax Relief and Job Creation Act of 2012, which provides the FCC with the authority to hold voluntary incentive auctions to repurpose television spectrum for mobile broadband use. (8) However, by the FCC's own admission, the reallocation of spectrum has historically taken several years. (9) Therefore the reallocation of broadcast spectrum and government spectrum to higher-valued uses could take years to fully implement and, even then, provides only a portion of the needed spectrum. (10) Accordingly, a "spectrum crunch" may be the market reality for the foreseeable future. As such it is important to understand what effects a binding spectrum constraint has on the nature of market performance in mobile wireless communications and how policy must adapt to this reality.

In this article, we shed some light on this important policy issue by formally modeling wireless competition under a spectrum constraint. Our findings reveal that while some in Washington policy circles increasingly view rising industry concentration (i.e., rising values of the Hirschman Herfindahl Index or "HHI") in the mobile wireless industry as a bellwether of poor market performance, the addition of a spectrum crunch to standard models of competition turns this standard, textbook view of market structure and performance on its head. Indeed, our analysis finds that under a binding spectrum constraint, competition among few firms will produce lower prices than competition among many firms, and will possibly increase sector investment and employment. As a result, given spectrum exhaust, policies that aggressively seek to engineer entry into the mobile market--such as efforts to impede incumbent carriers from acquiring more spectrum via either auction or acquisition--may do harm rather than good.

Our article is outlined as follows. …