Allocation of 3G Rights, Credibility and the Rules of the Game Experiences of the Swedish 3G Beaty Contest

As in many other countries Sweden has recently allocated licenses to the third generation (3G) of wireless telecommunication technology. But in contrast to Britain, Germany and Denmark, for example, a so-called beauty contest was used to earmark the rights. Promises of future infrastructure investments were used as criterion in the allocation of spectrum rights. The motivation was that using criteria other than price in the portioning of rights would be to the advantage of both consumers and producers and speed up the infrastructure investments. This paper questions the credibility of the promises made and claims that credibility of promises is a key problem in the use of beauty contests as allocation mechanism. The alternative allocation mechanism, an auction, does not suffer from the same problems of credibility. What is remarkable is that there was not much of economic analysis behind the decision to choose a beauty contest. Considering that the choice was between two ways of allocating rights to a scarce resource, the use of the radio spectrum, economists should have something to contribute. But surprisingly, they have not offered much. Theoretical underpinnings for the use of beauty contests seem to be lacking and the economic literature has very little to say. About the alternative, auctions, it has a lot to offer. An evaluation of a beauty contest is thus a little of a green field exercise. A strand of the literature that could serve as a theory of beauty contests is that of competition for the market. This is an approach inspired by institutional economic analysis adopted in this paper. Auctions and beauty contest can be looked upon as ways to achieve some of the goals of regulation without the negative effects on the entrepreneurial spirit. The purpose of the paper is to evaluate a beauty contest like the one staged in Sweden for the allocation of 3G rights from an entrepreneurial perspective. A comparative analysis is made with auction as an alternative means of allocation.