Making game theory pay

In 2000 the UK Government auctioned radio spectrum capacity for the soon-to-be launched new generation of 3G mobile phones, offering five telecom licenses to bidders. Using game theory (the study of how rules and tactics dictate the outcome of scenarios), a team led by Paul Klemperer and Ken Binmore at the ESRC Centre for Economic Learning and Social Evolution advised on how the auction should be designed to ensure spectrum efficiency and maximise profitability.

The researchers chose an auction model where there were multiple rounds of simultaneous bids. To remain in the auction, a bidder had to be 'active' in every subsequent round – either holding the top bid for a licence, or raising the bid by at least the minimum bid increase. At the end of every round all bids were revealed, the current top bidder was determined, and minimum bid increases were set for the next round.

The licensing auction eventually went through 150 rounds of bidding, running from 6 March to 27 April 2000, and ended up raising a total of £22.5 billion – four and a half times more than the original estimate of £5 billion, and seven times more than the likely outcome of a conventional auction.