IN JANuARy, THE U.S. Federal Communications Commission (FCC) launched one of the biggest auctions in history, selling off what some in the wireless industry have called the “beachfront property” of the electromagnetic spectrum. Its auction of the 700MHz frequencies, the largest and most valuable slice of spectrum to come available in years, brought in more than $19 billion.
PHO TOGRAPH BY CHAD BAKER
With the auction, the FCC inaugurated the first use in a major spectrum auction of “package bidding,” in which bidders are allowed to bid either on individual state licenses or regional packages of licenses. Although package bidding makes a lot of sense—for example, some bidders might be interested in buying state A only if they can be guaranteed to also get state B—until now, the FCC had not offered an auction design that gave bidders enough flexibility while keeping combinatorial and computational complexity in check.
The auction is a high-profile example of distributed algorithmic mechanism design, a field that combines economics and algorithm design. Economic mechanism design is
concerned with how to design a market or market-like institution so that it will achieve a desired goal, such as allocating goods efficiently, maximizing profit, or achieving an equitable distribution. Mechanism design is, in a sense, the inverse of game theory: in game theory, one is given the rules of a game and the goal is to predict the outcome; in mechanism design, one
is given a set of desired outcomes and the goal is to design a game that will achieve them.
In 2007, Leo Hurwicz, Eric Maskin and Roger Myerson were awarded the Nobel Prize in Economics for their work in economic mechanism design. Their theoretical work underpins a host of practical applications, including eBay’s auctions, the auctions used by Google and Yahoo! to sell ad slots, the matching system used to pair medical residents and hospitals, the California electric power exchange, the rules governing trades on NASDAQ and other financial markets, and, of course, the FCC spectrum auctions.
As auctions have grown more complex and more economic transactions
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