eThesis - School of Business electronic theses

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Purpose of the study:

The purpose of this study is to offer an overview on spectrum management methods and to provide a detailed analysis of one of them, namely the Administrative Incentive Pricing (AIP). This thesis discusses the background, purpose and determination of AIP by first shortly introducing the alternatives for AIP and then critically assessing the alternative ways to construct such payments.

The main economic models discussed include the opportunity cost based theory by Smith and NERA (1996) as well the subsequent, more refined model by Levine and Rickman (2007), which extends the Smith-NERA methodology to account for market structure and interference constraints. These models and the alternative ways of assigning frequencies are critically viewed against their core assumptions, regulator's objectives for spectrum management as well as from the point of view of economic efficiency.

Methodology:

The study is conducted as a literature review combining literature and publications from scientific research regarding spectrum management and formation of AIP payments, consultative research commissioned by the telecommunications authorities as well as publicly available information on realized market transactions for spectrum.

Results of the study:

Taking into account the growing demand and utilization of spectrum resources and given its scarcity, spectrum management and efficiency of use is crucial. Traditional administrative allocation and assignment methods need to be replaced by market based methods or complemented by market mimicking methods such as the AIP in order to fulfill efficiency.

AIP payments are currently constructed through three different kinds of methods basing the payment either on the concept of opportunity cost, realized market prices or treating the formation as an optimization problem where the regulator maximizes overall welfare with respect to the spectrum fee given the interference and resource constraints. The latter method (by Levine and Rickman) combines economic modelling and information theory arriving at a group of equations determining optimal AIP. The key conclusion is that in a setting where interference, market structure and overall welfare including consumer and producer surplus as well as the revenue impact for the government from imposing AIP are accounted for, the optimal AIP should be higher whenever spectrum sharing is possible. The AIP then act as Ramsey tax across sectors of the economy being inversely related to the elasticity of demand.

The method by Levine and Rickman explicitly accounts for most of the crucial elements of spectrum and spectrum markets, but further studies are needed especially to account for dynamic efficiency and how AIP payments may be used to promote it.