Can spectrum pricing and trading co-exist?

There have been moves towards greater reliance on market mechanisms for spectrum management – auctions, trading, private band management and leasing – in North America, the EU and a number of other countries. Alongside these developments, regulators have applied administratively determined spectrum prices with the aims of recovering administrative costs and promoting spectrum efficiency through prices reflecting opportunity cost and/or extracting producer surplus. A critical policy question is whether such pricing is compatible with the development of spectrum markets or whether the two policies are incompatible, in the sense that spectrum pricing may harm economic efficiency when spectrum is tradable.
In this paper we identify circumstances in which spectrum pricing may increase efficiency but find that spectrum pricing may reduce the efficiency of spectrum markets even where spectrum prices are set below expected opportunity cost (obligations on spectrum licence holders may have a similar impact by reducing potential gains from trade). The implication is that trading should in general be applied in preference to pricing (given its dynamic advantages). Spectrum pricing may, however, have a role in relation to spectrum utilised by government agencies where prices may provide stronger incentives than the opportunity to profit from trading (depending on the overall nature of incentives relating to government agencies including the process for setting and resetting their budgets).