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21-11-2023

Governing complex externalities: property rights for sharing radio spectrum

Authors: Thomas W. Hazlett, Ali F. Palida, Martin B. H. Weiss

Published in: Public Choice

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Abstract

Radio spectrum has become central to technological progress and economic growth. While, command-and-control regulatory institutions of the early twentieth century were considered necessary to counter endemic market failure, recent regulatory reform towards a market regime with flexible licensing creates an interesting environment for examining how complex externalities are managed by private contracting in decentralized systems. We present empirical evidence suggesting that adoption of a more “Coasean” policy regime in radio was followed by far more crowded wireless markets than were formed under rigid administrative structures. This is observed by contrasting pre-cellular mobile phone system outcomes in the U.S. (1946–1978) with the later evolution of cellular networks (1983–2015). The cellular marketplace exhibits exceedingly more complicated network coordination under liberalized property ownership rules. We nest our empirical findings within a conceptual framework derived from theoretical literature on property rights.

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Footnotes
1
This U.S. liberalization included reform of the rights assignment process, with license auctions introduced by the Federal Communications Commission in 1994. The pronounced characteristic of the policy trend of this era, however, was in the “flexible-use licenses” regulators introduced by relaxing restrictions embedded via administrative law, leaving additional choices as to spectrum deployments—and interference mitigation—to market participants (generally parties holding FCC licenses to supply mobile services). On the introduction of competitive bidding, see Hazlett (1998).
 
2
The identification of this formulation as the “Coase Theorem” did not come from Ronald Coase. “This proposition,” wrote George Stigler, “that when there are no transaction costs the assignments of legal rights have no effect on the allocation of resources among economic enterprises…. I christened… the Coase Theorem” (Stigler 1988, p. 77). Coase (1988) found this interpretation problematic, as he bemoaned: “My point of view has not in general commanded assent, nor has my argument, for the most part, been understood” (Coase 1988, p. 1; see also, p. 157).
 
3
Red Lion Broadcasting Co., Inc. v. Federal Communications Commission 395 U.S. 367 (1969), pp. 375–376.
 
4
Coase explicitly critiqued the Red Lion’s precursor, the Supreme Court decision in National Broadcasting Co. v. United States 319 U.S. 190 (1943).
 
5
Notable exceptions are found in Merrill & Smith (2001, 2011).
 
6
AMPS (Advanced Mobile Phone System) was analog cellular phone network standard. Calhoun (1988, 430–432) provides an excellent discussion of the FCC’s reform in eliminating the mandated format.
 
7
The FCC reported: more than $207.5 billion (FCC 2021, 45) in total license auction receipts in April 2021; $22.42 billion (FCC 2022a); in January 2022; and $419.13 million (FCC 2022b) in September 2022. These sum to $230.3 billion (in current dollars, not inflation-adjusted).
 
8
The FCC (2002, 35) characterized the emergent spectrum regulatory approach thusly: “A licensing model in which a licensee has exclusive and transferable rights to the use of specified spectrum within a defined geographic area, with flexible use rights that are governed primarily by technical rules to protect spectrum users against interference. Under this model, exclusive rights resemble property rights in spectrum, but this model does not imply or require creation of ‘full’ private property rights in spectrum.” The policy maintains the formal mandate in the 1927 Radio Act: “[T]his Act is intended to regulate all forms of interstate and foreign radio transmissions and communications within the United States… and to provide for the use of such channels, but not for the ownership thereof… for limited periods of time, under licenses granted by Federal authority, and no such license shall be construed to create any right, beyond the terms, conditions, and periods of the license.” This explicit denial of private property in spectrum has been circumvented by the FCC in maintaining “public interest” allocation of spectrum by regulators to licenses but then granting the licensees wide discretion in determining the use of the airwaves. See Hazlett (2019).
 
9
This regime continues through the present. We truncate the historical sample to approximate the timespan of the earlier regulatory episode.
 
10
The cellular era began with a 40 MHz allocation in the 800 MHz band in 1982; by 2010 the comparable FCC mobile allocation was 547 MHz of low- and mid-band spectrum (FCC 2010, p. 85). The more liberal trend in spectrum allocation is itself a component of the liberalization of interest. But it is not central to our hypothesis test.
 
11
This discussion tracks Hazlett (2017, 62–69, 176–177, 223–228).
 
12
Armstrong, distraught over the suppression of his life’s work, committed suicide in 1954, age 63.
 
13
Steven Chueng (1973) studied beekeeping, where inputs (bees) produce marginal products across two markets. Beekeepers in some cases were paid by farmers (orchard owners) to locate hives nearby (inducing additional pollination), while beekeepers sometimes paid farmers for placing hives in locations where honey production (captured by the beekeeper) was relatively productive. The analogy to the Apple-carrier contract is that the iPhone was generally so valuable to the mobile carrier that Apple was paid a premium to “locate” its devices there, despite the fact the carrier was also supplying a valuable input to Apple’s phone customers (radio spectrum).
 
14
Sarah Perez, The App Store Now Has 1.2 Million Apps, TechCrunch (June 2, 2014).
 
15
Mansoor Iqbal, App Download Data (2022), Business of Apps (Aug. 31, 2022).
 
16
Service revenue of the U.S. mobile wireless industry 1985–2021, Statista (Nov 10, 2022).
 
17
FCC Chair William Kennard demonstrated the general logic when speaking at an agency hearing, in May 2000, about relaxing rules for secondary market transactions: “I'm very excited about this prospect because, to me, it imports another powerful market-based tool to spectrum management and gets us out of this “mother-may-I” approach to managing the spectrum.” FCC (2000, 10).
 
18
“In terms of total mobile phone usage, Comscore found that 234 million Americans older than the age of 12 used a mobile phone. That’s about as close to universal adoption as you can get.” Smartphone Penetration Reaches 100 Million, Tech Guru Daily (Mar. 8, 2012).
 
19
The “market failure” claims made for spectrum markets by Goldin, Melody, the Supreme Court, and elsewhere were based on assessment of broadcasting; cellular did not launch in the U.S. until 1984. By way of comparison, the radio market of 1980 featured a little over 9000 stations nationwide (AM and FM). In 2011, there were 2289 TV stations assigned VHF and UHF channels. Coordinating interference among this number of fixed, one-way transmitters would appear orders of magnitude less complicated, as a technical matter, compared to policing conflicts among over 100 million mobile phone users (see Fig. 2) sending and receiving content wirelessly while stationary or moving at 70 miles per hour.
 
20
There is currently no scarcity of radio frequency space for terrestrial broadcasting on Mars. Open Access works perfectly well there today as a regime and it would make little sense to expend any substantial resources to attach State, Common, or Private Property Rights.
 
21
This is the somewhat antiquated name for interconnections between operators (as when a T-Mobile subscriber calls an AT&T subscriber). It now includes data transmissions, of course, that flow over the Internet and which may avoid the “public switched network” in part or in whole.
 
22
Indeed, while mobile network operators T-Mobile, Verizon and AT&T generally do own the FCC licenses granting the spectrum rights their subscribers utilize, each buys tower space from firms such as Crown Castle or American Tower. These suppliers host (and hoist) base stations on elevated platforms, improving cellular coverage. They exploit scale economies, supporting multiple (competing) carrier infrastructure in the same, advantageously located, platform. American Tower describes its company as an “operator and developer of wireless and broadcast communications real estate.” Across 43,000 properties in the U.S. and 181,000 internationally, it generates revenue by “leasing space on wireless and broadcast towers” and supplying “antenna systems… that speed network deployment.” While wireless networks used to build, own, and maintain such facilities internally, they have decidedly shifted in favor of contracting out this element of network provision. See, e.g., Sarah Thomas, Verizon Sells Towers & Wireline Assets for $15B, Light Reading (Feb. 5, 2015).
 
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Metadata
Title
Governing complex externalities: property rights for sharing radio spectrum
Authors
Thomas W. Hazlett
Ali F. Palida
Martin B. H. Weiss
Publication date
21-11-2023
Publisher
Springer US
Published in
Public Choice
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI
https://doi.org/10.1007/s11127-023-01108-2