Advice from ESRC-funded economists raised £22.5 billion for the government from an auction of radio bandwidths for 3G mobile phone licenses.
In 2000 the Government decided to auction additional 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 games), 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, promote competition and maximise profitability.
Binmore and Klemperer used their work in risk evaluation and games theory to argue that not only was a well-designed auction 'the method most likely to allocate resources to those who can use them most valuably', but it would also 'extract and use information otherwise unavailable to the Government'.
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.
With 13 original entrants, the first withdrawal came in round 94 as the cheapest licence passed £2 billion. 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. This windfall, equivalent to 2.5 per cent of the UK’s Gross Domestic Product, is enough money to build 400 new hospitals.