Spectrum license auctions with exit (and call) options: Alternative remedies for the exposure problem

- We model a stylized spectrum auction in which a potential entrant requires a minimum endowment.
- The standard simultaneous multi-round English clock auction (SMRA) gives rise to a severe exposure problem.
- The entrant responds with cautious initial bidding.
- We consider three remedies: a combinatorial Vickrey auction, a SMRA with exit option, and a SMRA with exit and call options.
- We find that the best remedy is the SMRA with exit and call options.

Inspired by some spectrum auctions we consider a stylized license auction with incumbents and a potential entrant. Whereas the entrant values only the bundle of several spectrum blocks (synergy), incumbents' marginal valuations are non-increasing. The seller proactively encourages entry and subjects incumbents to a spectrum cap. In this framework, a simultaneous multi-round auction (SMRA) gives rise to an exposure problem that distorts efficiency and yields low revenue. We consider three remedies and rank their performance: a combinatorial Vickrey auction, a SMRA with exit option that allows the entrant to annul his bid, and a SMRA with call option that lifts the spectrum cap if entry failed to occur and then allows the successful incumbent to acquire stranded spectrum at a fixed price.