DOJ’s Twisted Logic: Rigging Auctions Promotes Competition

It is with total disbelief that I write about a recent letter from the United States Department of Justice (DOJ) to the Federal Communications Commission (FCC) on the rules for the upcoming “competitive” Spectrum auction. In the letter, the DOJ – the United States’ chief antitrust and law enforcement agency – writes in support of proposed changes to the competitive spectrum rules – rules that would keep spectrum away from some large wireless providers (most notably, AT&T and Verizon) and “reserve” this spectrum for other wireless providers (specifically, Sprint and T-Mobile). The problem is that when different rules apply to different auction participants, the outcome is not a competitive auction; it’s a rigged one. You would think that the agency responsible for enforcing antitrust laws would know something as basic as competition.

In some contorted logic, the DOJ explains that it supports the FCC’s efforts to rig the auction for the purpose of promoting competition and innovation:

“The Commission has an opportunity through this spectrum auction to promote vigorous competition and innovation in wireless markets for the benefit of consumers. To that end, the Department continues to support the Commission’s decision to create a significant reserve of spectrum to ensure that wireless carriers, other than those that currently hold the majority of low-frequency spectrum, have a meaningful opportunity to acquire the spectrum necessary to foster a competitive wireless market.”

In really, competitive auctions are supposed to be fair, in order to assure that 1) wireless licenses go to the highest bidder, which permits the spectrum to go to its highest and best use; and 2) the auction proceeds, which go toward paying off the U.S. debt, are maximized. When rules are not totally competitive, neither of these objectives are fulfilled, and both consumers and taxpayers lose. But the DOJ misses this point when it writes:

“In balancing these priorities the Department urges the Commission to give considerable weight in determining the amount of spectrum included in the reserve to protecting and promoting competition and the well-established competition principle that those with market power may be willing to pay the most to reinforce a leading position.”

Excuse me? The DOJ has never determined that there is market power within the wireless industry, so the reference is simply rhetoric. Yes, the two largest wireless carriers have a combined 65% of the market share (1Q15), but only 39% of the spectrum. In comparison, Sprint alone has 16% of the market share and 33% of the spectrum. Where is the market power? It is in government’s hands when they determine winners and losers.

The implicit suggestion is that 65% of consumers are being forced to pick AT&T and Verizon. In other words, there is no market choice. In reality, consumers are voting with their dollars, and they obviously do not like the some competitors over others. This is how competition works and that is how firms learn to please consumers.

The fact that two carriers have more share than two other carriers is by virtue of their ability to satisfy consumer demand. I guess the government does not like consumers picking competitors and thinks it can do a better job.

However, this is more than that. It is government protection. The DOJ and the FCC are standing up for Japanese-owned Sprint and German-owned T-Mobile at the expense of U.S.-owned wireless providers. But who is standing up for consumers?

Americans should be taken aback by this letter. When your government picks winners and losers, it is all about cronyism and helping friends; it has nothing to do with competition and helping consumers. The fact is that the DOJ does not speak for the average American citizen. Rigging auction will not improve consumer welfare and it never helps competition.

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