For the last week or so, Indian newspapers have been reporting staggering numbers for the 3G spectrum auction in India. But the numbers keep increasing seemingly randomly and there doesn’t seem to be any end in sight. The government hopes to raise Rs. 35,000-45,000 crores (approximately $7-10B) through this exercise.I couldn’t find any news reports that explained the structure of this auction, so I googled a bit, and came across this document that generally explains how these auctions are designed and run. Here’s what seems to be going on:
- The problem: There isn’t one resource (one painting or one chunk of spectrum) that is being auctioned. What we have, instead, are separate chunks of spectrum which can be bid for together or separately. For example, a carrier can bid for a few ‘circles’ (the states of Gujarat, Maharashtra, etc., say), or for a nationwide license.
- The solution: The auction is conducted in several rounds. The first round starts at a ‘reserve price’ for each chunk of spectrum determined by the auction organizer (the government, in this case). Different bidders can bid incrementally higher amounts in each round (between 1-10% more than in the previous round, as determined by the auction organizers). If the prices are changing, the auction continues. This gives different companies to change their strategies and bid for groups of spectrum in different rounds. The auction ends when there are no more bids and price changes.
- The advantage of this method: This creates a more transparent environment for the bidders, but also allows different bidders to tweak and implement different strategies for collection of “circles,” which would not have been possible if each of the circles were bid for separately in one shot.