Cellular economies of scale and why disparities in spectrum holdings are detrimental

Now that traffic volumes are increasing rapidly, the cost of expanding capacity has become a large portion of expenditures for Mobile Network Operators (MNOs). This paper uses an engineering-economic model to show that there are strong economies of scale when expanding capacity, because an MNO with more spectrum benefits more from every new cell tower, and an MNO with more towers benefits more from every new MHz of spectrum. While it is technically possible to expand capacity by increasing either towers or spectrum holdings, we find that the cost-effective approach is to increase both types of assets at a similar rate. In the absence of countervailing policies, the big MNOs are well positioned to get bigger, in terms of spectrum holdings, towers, and ultimately market share. For policymakers, this economy of scale creates a trade-off between two important objectives: reducing the cost of cellular capacity, and increasing competition. This paper derives the Pareto optimal division of spectrum with respect to these two competing objectives, and shows that any Pareto optimal assignment will split the spectrum fairly evenly among competing MNOs. This is not simply a method of ensuring that there are many competitors; spectrum should be divided fairly evenly regardless of whether the number of competitors is large or small. A large disparity in spectrum holdings may yield poor results with respect to both objectives, i.e. the lower cost-effectiveness of a larger number of MNOs, and the lower competitive pressure of a smaller number of MNOs. One effective way to achieve a division of spectrum that is close to Pareto optimal is a spectrum cap, provided that this cap is set at a level consistent with other policies and policy objectives, including antitrust policy.