The Economic Effects of Spectrum Trading∗

We consider a model in which Cournot-Nash oligopolistic service providers are able to trade radio spectrum licences, subject to interference constraints. The terms of trade are endogenised through Nash bargaining. When the providers are in the same (geographical) market, the incentive to trade is due to cost differences; when they are in separate markets, differential demand conditions can also stimulate trade. We show that trade can enhance the productive efficiency of service provision (by concentrating production in low cost firms) but the resulting service consumer prices may have negative welfare implications. We then present numerical results from a program designed to simulate trading scenarios. these results illustrate a number of outcomes of allowing licence trades. We discuss a number of applications and extensions for our model and the relevance of our results for current government consultations on spectrum trading.