The
"Winner's Curse": lessons from game theory applied
to 3G European auctions
By Trisha J. Mitra
 Game
theory over the past two decades has swept the field
of economics, revolutionizing the methodologies used
to make sense of strategic interaction among diverse
economic agents. It can be applied to an array of
strategic encounters such as describing voting behaviour,
policy making, playing poker, how people contribute
voluntarily to a public good, and can even be utilized
in extreme situations such as the interaction between
terrorists and a government. And the use of game theory
in the construction of 3G auctions plays a crucial
role in understanding the disparity in outcomes among
the European countries.
The key element of game theory is the strategic behaviour
that influences how one agent (whether it is a person,
firm, nation, or institution) behaves and reacts when
its choices are dependent on those of others. But
in Europe, the results of the auctions for 3G licences
have differed significantly from one country to another,
and these cannot be taken into account merely by examining
asymmetric infrastructure costs or differences in
expected demand. Rather, the auctioning for 3G licences
can be explained by the use of strategic games between
the regulators and the telecom operators bidding for
a licence.
In Britain, for example, the London Business School
drew on advanced game theory to maximize the sale
of licence proceeds, and designed the complex multiple
auction system for the 3G licences. Meanwhile, 3G
bidders prepared their bids using game theory techniques
to adjust their business plans accordingly to the
rise in costs. But the 3G operators that were awarded
licences in the UK and Germany may plausibly be perceived
to have fallen into the “winner’s curse”,
where the winning bidder pays too much. The billions
from the 3G licences that will be raised for the British
treasury is said to have been as much as eight times
the government's initial estimates. A similar type
of curse can also be seen amongst oil companies bidding
for drilling rights.
However, studies have shown that experiments conducted
on multiple auctions, rather than single auctions,
reveal that the winner’s curse should diminish
after each consecutive auction, since bidders gained
more experience and knowledge about the procedure.
So why did the bidders still fall into the trap?
To take the UK as an example, a number of unique
factors came into play. These included:
· Being the first 3G auction in Europe –
gaining competitive advantage
· Investors’ expectation that licenses
would be awarded to their companies
· Little information to gauge accurate pricing
So why did game theory not predict this? Well, the
3G license is another sign that game theory requires
a further evolution. At the 13th International Conference
on Game Theory back in July, Martin Shubik, a pioneer
of game theory, stated that game theory's math models
always pivot on a "math person" who is removed
from social and business factors of the sort mentioned
above. Shubik had "serious doubts" about
some situations to which game theory sought to apply
itself.
A closer look at the implementation of strategic
game theory to the design of 3G licences in Europe
will be included in a Teleconomy report on the European
mobile markets due this upcoming Fall season. For
further information please contact trisha.mitra@teleconomy.com
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