While there has been only a limited use of market mechanisms to allocate airport capacity, both auctions and trading mechanisms have been used in other sectors. Various forms of “beauty contest”, often including a financial bid alongside qualitative criteria, have been used over a number of years to allocate licences for broadcasting and telecommunications services (where capacity is determined by the availability of radio spectrum). But in recent years a number of telecommunications licences (particularly for mobile phone services) have been allocated through sophisticated auction mechanisms. This experience is summarised in Section 5.3.1.
Capacity constraints can also arise because of environmental concerns about the impact of a particular activity. Fixed quotas have been established for fishing rights and environmental emissions, and Sections 5.3.2 and 5.3.3 summarise the trading systems that have developed in these cases.
5.3.1. Radio spectrum
Complex auction mechanisms have been used in a number of recent competitions to award telecommunications licences. In many of these, multiple lots have been on offer, covering cases where different lots have been either substitutes (for example because they offer
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equivalent coverage of the same region) or complements (because they relate to different regions).
The US Federal Communications Commission (FCC) has been at the forefront of the development and implementation of “simultaneous ascending auctions”, and has carried out around 40 such auctions over the past eight years. Similar approaches have subsequently been used in a number of countries, including Austria, Germany, Greece, Hong Kong, Italy, Latvia, the Netherlands, Singapore, Switzerland, Taiwan and the UK.
The basic idea of a simultaneous ascending auction is that bidders are allowed to bid for more than one lot, and the auction continues, potentially over many rounds, until there is no further bidding.34 Bidders can therefore “manage” their portfolio of lots by adjusting their
bids during the course of the auction.
Over time, FCC has refined the design of its auctions to take account of emerging evidence about how particular approaches work in practice. For example, it introduced an “activity rule” that allowed bidders to focus initially on securing core licences, and once they were reasonably sure of winning a core licence they could then extend their bidding to more peripheral licences. This rule was introduced in response to complementarity problems, but as a side effect it tended to make the auctions last longer.
Another problem, due to the approach of dealing with complementarities by the means of an activity rule, arose when bidders were suspected of colluding, in particular by submitting unusually high bids for certain lots, in order to signal their intentions to other bidders. FCC attempted to address this by placing constraints on the ways that bids could be increased between rounds, though it is not clear that the approach it adopted has in fact eliminated the possibility of collusion.
More recently, FCC has carried out a simultaneous ascending auction that also allowed for conditional or “package” bidding. In addition to submitting bids for individual lots, participants could also submit bids for complete “packages”, such that the bidder would win either all or none of the individual lots making up the package. This represents a powerful way to address the so-called “exposure risk”, that a bidder will be left with peripheral licences (which are not useful on their own) and fail to win a core licence. While combinatorial auctions are theoretically superior to standard simultaneous ascending auctions for markets in which complementarities are a problem, they are still relatively untested and only very limited experience is available.
Further details of these auctions, together with a description of theoretical arguments for applying different auction designs, are contained in Appendix D.
34 In practice, to prevent the process extending over an excessive number of rounds, some auctions allow for a final,
71 5.3.2. Fishing
A number of states around the world apply quotas to limit the quantity of fish (of different kinds) that can be caught in a particular year. In the EU, this falls within the Common Fisheries Policy. Internationally, the UN’s Food and Agriculture Organization (FAO) has promoted a Code of Conduct for Responsible Fisheries and is promoting a number of international action plans in support of these principles.
In most states that have implemented fishing quotas, there is an initial allocation of quotas based on the historic catch rates of quota holders, often combined with criteria such as vessel size or power. There are also a few cases where particular quotas are divided equally among the fishing industry.
Many of these quotas are transferable, and therefore trading has taken place in a number of states, including Australia, Canada, Chile, Iceland, the Netherlands, New Zealand and the US. The most common approach is simply to allow trades to be agreed through bilateral negotiations between potential buyers and sellers.
In Iceland, however, where quota trading is most developed, trading has involved both brokers and, between 1999 and 2001, an official exchange. Fishing quotas have been used by Iceland since 1975, with individual transferable quotas (ITQs) introduced in 1979 and applying across all fisheries since 1991. ITQs are infinitely divisible and, though fishing permits are associated with vessels, this has not restricted market participation by brokers and others not owning vessels.
There are currently three to five quota brokers in Iceland, operating on a commercial basis and typically charging commission of about 0.5 per cent. The Association of Vessel Owners has also set up a trading room to facilitate trades between its members. Trading volumes for ITQs are equivalent to approximately 80 to 90 per cent of the total annual quota, and up to 20 per cent of indefinite quotas change hands each year.
The computerised official exchange, which operated between 1999 and 2001, was introduced in order to ensure the anonymity of traders. This followed allegations that the provision of cheap quotas by fish processors to vessel owners was resulting in artificially low fish prices. Use of the exchange was mandatory for all ITQ trades. In practice, however, the exchange added to the costs of market participants and slowed the trading process. Because of the importance of quota trading to the fishing industry in Iceland, the exchange was abandoned in 2002.
5.3.3. Environmental emissions
Quotas on environmental emissions have been introduced in a number of states. In the US, restrictions on sulphur dioxide and nitrogen oxides were introduced to tackle the primary causes of acid rain. Trading generally takes place through bilateral agreements between
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registered participants, and trades have to be notified in order to update the information used to monitor companies’ compliance with their quotas.
More recently, Denmark and the UK have established quotas and trading schemes designed to control greenhouse gas (GHG) emissions. Many other states in Europe, North America and Australasia are considering the introduction of similar schemes.
The UK quota and trading scheme is voluntary, and is backed up by government subsidies for companies agreeing to reduce GHG emissions. The initial allocation of, and rate of subsidy for, emissions reduction targets was determined by an auction. These emission reduction targets can now be traded between companies registered for the scheme, either directly or through brokers.35
The Danish scheme is compulsory, but applies only to electricity producers’ carbon dioxide emissions. Initial quotas were allocated to companies (rather than plants), based on a grandfathering principle. Trading has been permitted on a bilateral basis since 2000, but volumes have been small and are thought to be insufficient to support a “carbon exchange”.36