Auctions Versus Beauty Contests: The Allocation of UMTS Licences in Europe

The deployment of the so‐called UMTS 3rd generation mobile networks is a step of vital importance for the promotion of competition in the telecommunications sector. The provision of high‐traffic services presupposes that operators have access to the hertzian spectrum. The hertzian spectrum is a natural resource whose scarcity derives from the fact that only part of it is usable, for both technical and economic reasons. While the resource was sufficient to meet users' needs, the hertzian spectrum was allocated for little or no charge, on the principle of ‘first come, first served’. However, with the explosion of technical progress in transmission technologies, new applications and new forms of use appeared, leading to a drastic increase in potential demand. It is in this context that the idea of charging for use of the spectrum arose, so as to discourage uneconomical use of the resource (e.g. stockpiling, wastage), to ensure a fair allocation between competing users and to forestall congestion. The purpose of this paper is first to examine the procedures for the allocation of hertzian spectrum operating licences, from the points of view of efficiency, transparency and sharing of the surplus. We shall then compare the results from the two approaches that were actually used in Europe: the open ascending auction and the beauty contest, before turning our attention to new forms of public action that result from the process of liberalization.