Spectrum auctions in the presence of network externalities

In recent years governments in a number of countries have auctioned exclusive rights to develop and utilize UMTS (Universal Mobile Telecommunications System), some with more success than others. Much theoretical effort has been put into discussing whether or not to auction the rights and the correct design of the auction. However, the authorities obviously perceive that there are some externalities associated with the introduction of this new technology. The fear that the rollout will be slower and less extensive than what is felt optimal from society's point of view have been attacked, in principle, by two different approaches. One is to impose minimum standards for rollout and speed of development and conduct an auction where cash is the bidding variable (e.g. U.K.), the other is to have a beauty contest with coverage and speed of development as the bidding variable (e.g. Norway). In this paper focus is on a third alternative, i.e. to auction the rights based on cash bonus bidding and to subsidize coverage. Bidding strategies when auctions are combined with ex post subsidies have received surprisingly little attention in the theoretical literature. The presence of subsidies connected to rolling out the network will increase expected revenue from the auction, whereas the subsidy will not be paid until the network is actually developed. But the subsidy will also have the effect of reduced bid intensity since it increases asymmetry between bidders