DP11173 | Ownership Concentration and Strategic Supply Reduction

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We explore ownership concentration as a means to seek rents in the context of the U.S. government's planned acquisition of broadcast TV licenses in the upcoming incentive auction. We document the significant purchases of licenses by private equity firms in the run-up to this auction and perform a prospective analysis of the effect of firms controlling multiple licenses on the outcome of the auction. Our results show that multi-license holders are able to earn large rents from a supply reduction strategy where they strategically withhold some of their licenses from the auction to drive up the closing price for the remaining licenses they own. Relative to the case where each license is bid into the auction independently, spectrum acquisition costs increase by one third to one half. Strategic behavior by multi-license holders reduces economic efficiency as the set of licenses surrendered into the auction is not the socially optimal set. A case study illustrates the mechanism in a specific local media market. We propose a partial remedy that mitigates the effect of ownership concentration and reduces the distortion in payouts to broadcast TV license holders by one to two thirds.