Competition and Auctioning Licenses

Promoting competition in domestic markets is very often an important policy concern of governments in context of developmental objectives. Direct government intervention of different forms to promote competition becomes all the more necessary especially in the markets that have higher tendencies to concentrate. For example, in the market for telecom spectrum licenses, many countries impose ceilings on the number of licenses that a single individual company can possess. It is commonly believed that in the markets where permission from government is required for fresh operation or expansion of operation, e.g. through licenses, larger number of licenses lead to higher competition. But some earlier literature show that increasing the number of licenses might actually be detrimental to competition contrary to popular belief. This paper considers a situation where there is an incumbent monopolist in a market; the government is auctioning two new licenses, one for this same market and another one for a completely new market where no firm had been operating so far. A number of potential entrants are willing to bid for both the licenses. The incumbent firm is allowed to purchase only one of these licenses. If it purchases the license for its own market it can retain its monopoly position. The selling procedure dictates that only the potential entrants will be bidding and in order to purchase the license in its existing market, the incumbent monopolist has to match the highest bid in that auction. Alternatively, it can bid for the entry license for the new market. This paper tries to identify under what conditions the incumbent firm will bid for the outside market. It also tries to find under what conditions providing some other options to the incumbent firm leads to increased competition in the existing market, thus contributing to developmental prospects by enhancing social welfare.