Consultation on a Licensing Framework for Broadband Radio Service (BRS) — 2500 MHz Band (sf10476)

Annex A — Spectrum Availability in the 2500  MHz Band as of June 2012

(Subject to change prior to the 2500 MHz spectrum auction)

Annex B — 2500 MHz Band Site-specific Fixed Service Licensees
as of June 2012

Annex C — 2500  MHz Band Site-specific Grandfathered Licences in Manitoba as of June 2012

Annex D — The Combinatorial Clock Auction (CCA) Format

1. Industry Canada is proposing to use a combinatorial clock auction (CCA) format for the 2500 MHz band auction. A CCA is a bidding process that includes a price discovery stage, similar to the SMRA auction format. However, the CCA format also has attributes that remove or reduce some design concerns associated with the SMRA format. In particular, in a CCA, bidders are able to bid for packages of licences instead of individual ones, eliminating the risk that bidders may win some but not all of the licences that they desire. This is particularly important given the regional nature of the licences to be auctioned and the strong and varied complementarities that exist between these licences.

2. Other attributes are being proposed for the 2500 MHz auction, such as the use of generic licences and anonymous bidding. Generic licences are blocks of spectrum that are similar in terms of frequency location in the band, block size, technology and interference constraints and are of comparable value, such that they can be grouped together in a “single category” in each service area for bidding purposes in the auction. The use of generic licences will decrease bidding complexity by reducing the number of combinations on which bids may be placed, and will enhance the possibility of substitution among licences. The use of anonymous bidding will reduce the potential for gaming strategies. Pricing rules and activity rules that encourage truthful bidding throughout the auction process, i.e. bidding in a manner that is consistent with how a bidder truly values the package, will further improve the process.

1. Overview of the CCA

3. A CCA consists of two stages, the allocation stage and the assignment stage (Figure D1). In the allocation stage, the number of spectrum licences that a bidder will win in each service area is determined, as well as the base price to be paid by each winning bidder. Where generic licences are offered, an additional stage is needed to determine the specific frequencies that will be assigned to each winning bidder. This stage is referred to as the assignment stage.

Figure D1: CCA Process

2. The Allocation Stage

4. The allocation stage of the auction determines the winning bidders and the number of licence blocks that they have won. The allocation stage is divided into two phases: the clock rounds and the supplementary round. All valid bids submitted during both phases of the allocation stage are used to determine the winning packages and base prices.

5. The clock rounds allow for price discovery, helping to reduce a bidder’s uncertainty regarding the value of the licences. Bidders are able to respond to the changes in prices accordingly, shifting their bids to licences that continue to be consistent with their business objectives.

6. During each clock round, bidders are able to bid on only one package of licences; however, there may be other packages that they would be interested in winning. The supplementary round provides bidders with an opportunity to improve bids that they placed in the clock rounds and/or to submit bids that they were eligible to bid on but unable to submit in the clock rounds.

7. All bidders are subject to a spectrum aggregation limit of 40 MHz in each service area, with the exception of the Northwest Territories, Yukon and Nunavut, where no aggregation limit applies. The aggregation limit includes both the paired and the unpaired spectrum available for auction, along with any spectrum licence holdings that bidders already have, but excludes the restricted bands at 2570-2575 MHz and 2615-2620 MHz. Therefore, with the exception of the Northwest Territories, Yukon and Nunavut, bidders will not be permitted to bid on additional licences in a service area where their spectrum aggregation limit would be exceeded. The auction software will not allow bidders to submit a bid that exceeds their spectrum aggregation limit.

3. Clock Rounds

8. The allocation stage begins with the clock rounds. Licences or sets of generic licences (substitutable licences of comparable value) are separated into categories and are defined prior to the auction.

9. For the 2500 MHz auction, Industry Canada is proposing two categories of licences, paired and unpaired, with the following blocks available in each service area of the identified regions (Table D1):

Region A (43 service areas)

• blocks C/C’ to G/G’ (five paired generic licences of 10 + 10 MHz);
• block I (one unpaired licence of 25 MHz);

Region B (16 service areas)

• blocks E/E’ to G/G’(three paired generic licences of 10 + 10 MHz);

Region C (2 service areas)

• blocks A/A’ to B/B’ and E/E’ to G/G’ (five paired generic licences of 10 + 10 MHz); and
• block H (one unpaired licence of 25 MHz).

10. A category in a given service area is referred to as a product. Given the proposal of two categories in Region A (43 service areas), one category in Region B (16 service areas) and two categories in Region C (two service areas), 106 products are proposed for the 2500 MHz auction.

11. The licences are auctioned simultaneously over multiple clock rounds. In each round, bidders indicate the number of licences in each product on which they would like to bid given the prevailing prices. The bid could be for “0,” “1” or “2” licences for a product in any category containing multiple generic licences except for products in the Northwest Territories, Yukon and Nunavut, where bids of “3,” “4” or “5” licences are also permitted (since these service areas are not subject to the spectrum aggregation limit of 40 MHz in the 2500 MHz band). For a product in an unpaired block category, which contains only one licence, the bid could be for “0” or “1” licence. All of the individual bids placed by a bidder in a given round are considered to be a single package bid, creating an all-or-nothing bid. The price of the package bid is equal to the sum of the bids for individual products, evaluated at the prevailing clock prices.

12. When there is excess demand for a product, its price increases in the next round. There is excess demand for a product when the number of bids exceeds the number of licences available.

13. To remain in the auction, a bidder must submit a valid bid for at least one licence in the first clock round. This bid cannot be withdrawn and will be part of the bids considered in determining the assignment of licences at the end of the allocation stage. All valid bids submitted during the clock rounds are binding and will be considered in determining both winning packages and base prices after the supplementary round ends.

14. In the clock rounds, bidding remains open on all products until there is no excess demand for any of the products.

4. Conclusion of Bidding in the Clock Rounds

15. The clock rounds end when there is a round in which there is no excess demand for any of the products. This round is referred to as the final clock round. The package on which a bidder placed a bid in the final clock round is referred to as its final clock package. At this point, Industry Canada will announce that the clock rounds have ended and that the auction will proceed to the supplementary round (see Section 9).

16. In the final clock round, all licences may be tentatively allocated. Conversely, there may be some unallocated licences in the final clock round due to a licence never having received a bid, and/or bidders reducing or substituting their demands in any clock round, including the final clock round.

17. If all of the licences are tentatively allocated, then the bids placed in the final clock round are the provisional winning bids. If there are still some unallocated licences, a bidder can guarantee that it will win its final clock package by submitting a supplementary bid that increases the dollar amount of its final clock package bid by at least the final clock price of the unallocated licences minus the opening bid prices of the unallocated licences. This guarantee may be compromised if all other supplementary bids do not include, at a minimum, all licences contained in the bidder’s final clock package.

5. Information in the Clock Rounds

18. At the beginning of each clock round, bidders have access to sufficient information to permit price discovery and inform their bidding strategy. This information includes their own bids from the previous round and the number of eligibility points that they will have in the next round, as well as the aggregate demand for each product from the previous round and the prices for each product in the next round. It is proposed that bidders would not be informed about the individual bids submitted by other bidders or the remaining eligibility of other bidders.

6. Bid Increments

19. Industry Canada is consulting on the opening bid amounts for each of the licences being auctioned. The opening bid amounts being proposed can be found in Table 5, Section 8.2 of the main document. In the first clock round, the price of each licence is equal to the opening bid price as stated in the final licensing document.

20. During subsequent clock rounds, if there is excess demand for a given product, the prices for the given product increase in the next round. Industry Canada will use activity-based increments as a mechanism to determine the bid increments. The increment for each product is based on the excess demand for the product during the previous round. Products that generate greater excess demand are subject to a larger bid increment than products that generate less excess demand, all other things being equal. Bid increments increase more quickly for products with higher demand, potentially shortening the length of the auction. If there is no excess demand, the price for the product does not increase in the next round.

21. Industry Canada will decide on the bid increments for the 2500 MHz auction. Details concerning the calculation of bid increments will be included in the final licensing framework.

7. Eligibility Points

22. Each of the 318 licences has been assigned a specific number of eligibility points that are related to the population covered by the licence and the estimated value of the spectrum. One eligibility point has been assigned per 50,000 in population for each 20 MHz block of spectrum (either paired or unpaired) in a service area. The eligibility points per spectrum block were then adjusted to reflect the estimated value of the spectrum licences as indicated by the opening bid price base rate. Section 8.3 of the main document lists the proposed eligibility points associated with the paired and unpaired blocks of spectrum being auctioned, as well as the population of their respective service areas.

23. In their applications, applicants must indicate the total number of “points” worth of licences on which they wish to bid. This number defines a bidder’s initial level of eligibility points and hence, the maximum number of licences a bidder is eligible to bid on at the start of the auction. Eligibility points are also used to determine the financial deposit that must be submitted with the application.

24. Bidder eligibility points cannot be increased once the auction has started.

8. Activity Rules in the Clock Rounds

25. Activity rules have been established to encourage truthful bidding throughout the clock rounds. This facilitates the price discovery process, allowing bidders to make changes to their bidding strategies dynamically throughout the auction, in response to increasing prices. The activity rules discourage a bidder from misrepresenting its preferred package, as doing so will limit the bidder’s ability to bid on what it really wants later in the auction.

26. The activity rules in the clock rounds consist of an eligibility point rule and a revealed preference rule. The two rules work in combination to accommodate their relative shortcomings. The motivation for using both rules is to ensure that the activity rules do not prohibit bidders from bidding on their most preferred package.

27. Bidders begin each round with a set number of eligibility points and these determine the maximum activity level for that round. For example, a bidder with 100 eligibility points can bid on licences whose total sum of associated points is 100 or less.

28. The eligibility point rule considers the size of the package that the bidder is bidding on, where size is the sum of the eligibility points for each licence in the package. The eligibility point activity rule requires bidders to bid on packages of the same size or smaller as prices rise. When a bidder switches to a package that is smaller than the package it has previously bid on, (that is, with licences that are worth fewer eligibility points), its eligibility is reduced. A round in which a bidder’s eligibility is reduced is called an eligibility-reducing round. These rounds play a special role in the proposed activity rules of the 2500 MHz auction.

29. In Round 1, a bidder’s eligibility is established by its pre-auction financial deposit submitted at the time of application. In subsequent rounds, a bidder’s eligibility is determined by its activity level in the previous round. Therefore, if a bidder wishes to maintain the same eligibility level as in the previous round, its activity level must correspond to the same number of eligibility points in each round. A bidder’s eligibility points can never increase.

30. If a bidder falls short of the required activity level in any round, its eligibility point level is reduced accordingly, so that the total points worth of licences on which it can bid in the next round are limited in relation to its actual activity level in the current round. For example, consider an eligibility point rule where the activity level is 100%. If a bidder starts the round with 100 eligibility points but bids on licences worth only 80 eligibility points, in the subsequent round that bidder’s eligibility will drop to 80 points. The bidder’s eligibility remains at 80 points until a round in which it bids on a package worth fewer than 80 points, at which time its eligibility would be reduced accordingly.

31. However, there are some shortcomings with using only the eligibility point rule. Price discovery might be lessened, as there is an incentive for bidders to choose only larger packages when prices are low, rather than a package that may work better for them, so that they maintain a higher number of eligibility points for later in the auction. Furthermore, an eligibility point rule may prevent a bidder from making a desirable substitution to a package that is larger in terms of associated eligibility points, but which has become relatively less expensive. In such a case, the eligibility point rule would prevent the bidder from bidding on its most preferred package.

32. A revealed preference rule would lessen these problems, as it allows bidders to exceed their eligibility points in order to bid on packages that have become comparatively less expensive. Revealed preference refers to the information that a bidder discloses regarding its inclination toward one package versus another. In particular, if a bidder chooses one package over another given a certain price differential between the two packages, then the bidder should always choose the same package given the same price differential. This rule would afford bidders greater flexibility to fully express their preferences in the clock rounds of the auction, ensuring that activity rules do not prevent a bidder from bidding on its most preferred package.

33. For example, suppose that a bidder desires either a smaller package, X, or a larger package, Y, but not both. At the current prices, X is preferred, but in subsequent rounds, the prices for the licences in X increase much faster than the prices for the licences in Y. As a result, the bidder prefers Y to X at the new prices. The revealed preference rule allows the bidder to switch from X to Y because Y is now the better value. In contrast, the eligibility point rule would not allow the switch because Y is larger than X. This example illustrates the problem with using the eligibility point rule exclusively and the advantage of using the eligibility point rule in combination with the revealed preference rule.

Revealed Preference/Eligibility Point Hybrid Activity Rule

34. A revealed preference/eligibility point hybrid activity rule is being proposed for each clock round. It comprises both an eligibility point rule and a revealed preference rule.

35. The proposed eligibility point activity requirement for the 2500 MHz auction is 100%. Specifically, in each round, a bidder is required to bid on licences whose total sum of associated points is equal to 100% of its eligibility points if it wishes to maintain that eligibility level in the subsequent round.

36. The bidder can always place a bid for any package that is within its current eligibility. However, as prices increase, a bidder’s eligibility is generally reduced. There may be a point in the auction where the bidder wishes to switch to another package that is larger, but is relatively less expensive. With the revealed preference rule, the bidder can bid on a larger package than would be permitted by the bidder’s current eligibility provided that the package satisfies the revealed preference rule with respect to each prior eligibility-reducing round.

37. However, bidding on a larger package will not increase the bidder’s eligibility in subsequent rounds. Furthermore, a bidder will be unable to bid on a package with associated eligibility points that exceeds its initial eligibility. For an algebraic description of the revealed preference rule in the clock rounds, see Annex F. For an example of the revealed preference rule in the clock rounds, refer to Annex E.

38. The combination of the two activity rules will allow a bidder to bid on its most preferred package in every clock round. A bidder can continue to bid just as it would under the eligibility point rule. The only difference is that the bidder is given some extra flexibility to bid on a larger package provided that the bid on the larger package satisfies revealed preference, i.e. the bid involves a switch to a package that has become relatively less expensive.

39. As a result, price discovery is improved and the final clock allocation becomes a better predictor of the auction outcome.

9. Supplementary Round

40. The second phase of the allocation stage is the supplementary round. The supplementary round is a single round process, in which bidders have the opportunity to place additional bids for packages, subject to constraints that are based on the bids that they placed in the clock rounds (Section 10 of Annex D). These additional bids could be used to improve bids on packages previously submitted in the clock rounds and/or to submit bids for which they were eligible to bid on, but unable to in the clock rounds.

41. In the clock rounds, a bidder is allowed to bid on only one package of licences per round. As there may be other packages that a bidder would be interested in winning, the supplementary round provides bidders with an opportunity to submit bids on multiple packages that they were willing and eligible to bid on in the clock rounds, but did not necessarily bid on.

42. If there are licences that remain unallocated at the end of the clock rounds, the supplementary round provides bidders with the opportunity to win some or all of the unallocated licences. Bidders also have the opportunity to guarantee that they win their final clock package by submitting a supplementary bid that increases the dollar amount of their final clock package by at least the value of the unallocated licences as evaluated at the final clock prices minus the opening bid prices of the unallocated licences. This guarantee may be compromised if all other supplementary bids do not include at a minimum, all licences contained in the bidder’s final clock package.

43. If all of the licences are allocated at the end of the clock stage, then the supplementary round will not affect the final clock allocation. However, the supplementary round provides an opportunity for bidders to be reassured that they themselves were not prepared to pay more than the winning bidders for the licences in question.

10. Activity Rules in the Supplementary Round

44. Activity rules in the supplementary round encourage truthful bidding throughout the allocation stage of the auction, not just in the latter stages. The proposed activity rules ensure that supplementary bids are consistent with bids from the previous rounds.

45. Any bidder that placed at least one valid bid in the clock rounds may submit bids in the supplementary round. A bidder is not required to submit bids in the supplementary round if it does not so desire.

46. All licences are available for bidding in the supplementary round so that bidders can improve on bids submitted during the clock rounds, or submit bids for packages of licences not expressed in the clock rounds.

47. A bidder can only make one supplementary bid for a given package of licences. For the 2500 MHz auction, the limit on the number of different packages for which a bidder will be allowed to place supplementary bids will be no lower than 500 different packages and will be announced after the bidder qualification period.

48. The bid amount for a supplementary bid must be at least the sum of the opening bid prices for all the licences included in the package. Furthermore, if a bidder submitted a bid for a certain package in the clock rounds, the supplementary bid amount must be at least the bidder’s highest bid for that package.

Revealed Preference Limit

49. Each bid in the supplementary round must satisfy the following revealed preference limit activity rule.

50. Revealed Preference Limit: There is no limit on the supplementary bid amount for the final clock package, which is the package that the bidder bid on in the final clock round. All other supplementary bids must satisfy revealed preference with respect to the final clock round, regardless of whether the supplementary bid package is larger or smaller than the final clock package.

51. In addition, supplementary bids for packages that are larger than the final clock package, as measured by eligibility points, must satisfy revealed preference with respect to each eligibility-reducing round, beginning with the last round in which the bidder had sufficient eligibility to bid on the package. The application of the revealed preference limit to limit bids on packages larger than the final clock package could have the effect of creating a chain of constraints on the dollar amount of a supplementary bid relative to the dollar amount of other supplementary bids submitted by the bidder.

52. There is an exception to the above. A supplementary bid for a package comprised solely of the bidder’s final clock package plus some or all of the unallocated licences only needs to satisfy revealed preference with respect to the final clock round. This is to provide bidders with additional flexibility in bidding on licences that are unallocated as of the final clock round. By relaxing the constraints on bids for such packages, the probability of awarding unallocated licences can be improved without reducing the probability that any bidder receives its final clock package.

53. These activity rules guarantee that the final clock allocation will not change if there are no unallocated licences. Each winner is guaranteed to win its final clock package without making any supplementary bids. If there are unallocated licences, each winner is guaranteed to win at least its final clock package by submitting a supplementary bid that increases the dollar amount of its final clock package by at least the value of the unallocated licences as evaluated at the final clock prices minus the opening bid prices of the unallocated licences. This guarantee may be compromised if all other supplementary bids do not include at a minimum, all licences contained in the bidder’s final clock package.

54. The revealed preference limit with respect to the final clock package provides the bidder with an incentive to bid on the most preferred package throughout the clock rounds. This is because supplementary bids are limited by bids submitted in the clock rounds. Given that the bidder does not know which round will be the final clock round, the bidder will be motivated to always bid truthfully to improve its chance of winning its most preferred package; otherwise the bidder will be constrained in the supplementary round.

55. Industry Canada will decide on the process for submitting supplementary bids. Details concerning the process will be included in the final licensing framework.

11. Determining the Winning Packages in the Allocation Stage

56. All valid bids received from bidders in the clock rounds and the supplementary round are considered for the determination of winning packages. In addition, a reserve bid for every licence, at the opening bid price, will be included in the determination of winning bidders at the end of the allocation stage. This process will act as though Industry Canada is a bidder in the auction, placing a bid on every licence at the opening bid price. The inclusion of a reserve bid for every licence is to ensure that the incremental value that a bidder would be prepared to pay for an additional licence is at least the opening bid price of that licence. The reserve bids will not be treated as a package, but rather as having been placed by different bidders so that any number of reserve bids can be selected in the winning combination.

57. An algorithm will be used to identify the highest value combination of valid bids with each bidder winning at most one of its packages. If there is only one combination of bids that meets the criterion, this will be the winning outcome that determines the winning packages and winning bidders.

58. If there is more than one set of valid bids having the equal highest value, the tie will be resolved, first, by minimizing the number of "lost licences," where a lost licence is a licence that was included in the bidder’s final clock package but is not included in an alternate package that could be assigned to the bidder. The rationale for selecting the combination of valid bids that minimizes the number of lost licences as the first tie-breaking rule is to select an assignment that is the most similar to the final clock allocation.

59. If there is still a tie, the second tie-breaking rule is to select the combination of valid bids which includes the greatest quantity of spectrum, measured in terms of eligibility points. Note: If reserve bids are part of the winning combination, the eligibility points associated with the reserve bids will not count towards the eligibility points of the winning combination. This is to maximize the quantity of spectrum that is allocated. If, subsequently, there is still a tied outcome, the tie will be broken by a pseudo-random number generator built into the auction software.

60. Industry Canada will decide how best to validate the results following the use of the algorithm. Further details will be included in the final licensing framework. This will include details of the algorithm to be used and also how Industry Canada intends to validate the results following the use of this applicable algorithm.

12. Determining the Base Price in the Allocation Stage

61. The base price is the minimum amount that the winning bidder will pay for its generic winning packages. It does not include the additional, incremental amount that the winning bidders may pay to be assigned specific licences in the assignment stage. The base price is determined using all valid bids submitted by all bidders during the allocation stage.

62. Industry Canada is proposing to use a second-price rule to calculate the base prices such that winning bidders, individually and collectively, will pay the lowest amount that they could have bid on their package of licences and still have won. In other words, a winning bidder will pay an amount that is sufficient to ensure that there is no other bidder or group of bidders prepared to pay more for the licences. This amount is typically less than the actual winning bid submitted in the allocation stage, either in the clock rounds or the supplementary round, and must be greater than or equal to the total sum of the opening bid prices for the combination of licences included in their winning package. The benefit of using a second-price rule is that it encourages bidders to bid truthfully, potentially leading to a more efficient outcome.

63. Industry Canada is proposing to apply bidder-optimal core prices and to use the "nearest Vickrey" approach to determine the base prices. Further information on the determination of base prices can be found in Annex G.

13. Information at the End of the Allocation Stage

64. At this point, bidders will know with certainty the number of licences that they have won; however, where there are generic licences, bidders will not necessarily know the specific licences that have been assigned to them.

65. At the end of the allocation stage, each bidder will be informed of its own winning package, along with the base price that it will pay for its package. All bidders will be informed of the number of winning bidders and the number of licences within each product that have been allocated.

14. The Assignment Stage

66. As there are generic licences, the auction will then advance to the assignment stage, where the specific assignment of the generic licences will be determined. Only bidders that have won one or more generic licences during the allocation stage will participate in the assignment stage.

67. The assignment stage will consist of a sequence of assignment rounds. In each assignment round, bidders will be presented with a set of frequency range options available to them for the products being assigned in the round. The options will comprise contiguous frequency ranges of a product, corresponding to the number of licences that the bidder won in the allocation stage and taking into consideration the number of licences allocated to other bidders.

68. Industry Canada is considering how best to structure the assignment rounds to enable winning bidders to bid effectively for their preferred frequency assignments across multiple service areas. Industry Canada is proposing to run product-by-product assignment rounds in descending order of the populations of the associated service areas, conducting a separate round for each product that requires an assignment round. This process would enable bidders to know which specific frequencies they have won in the most populated service areas before they participate in the assignment rounds for the adjacent, less populated service areas. However, two or more products would be aggregated into a single assignment round if all of the following criteria are met: the products are in the same region (i.e. Region A, Region B or Region C); their service areas form a contiguous geographic area; and the winners, and the number of generic licences they have won are sufficiently similar across service areas, according to predefined criteria.

69. Winning bidders will be allowed to submit top-up bids for the specific licence(s) that they most prefer in each service area. This bid reflects the incremental value that the bidders place on winning these particular frequency blocks.

70. Winning bidders do not have to place bids in the assignment stage if they do not have an assignment preference, as they are guaranteed the number of generic licences that they have already been allocated. Each winning bidder has both a right and an obligation to purchase one of the frequency range options presented to it in the assignment round.

71. An algorithm will be used to identify the combination of specific assignments of licences that result in the highest bid amount. In the event of a tied outcome with more than one specific assignment producing the same total value, the tie will be broken by a pseudo-random number generator built into the auction software.

72. Similar to the determination of base prices in the allocation stage, a second-price rule will be used to determine the assignment price to be paid for the assignment of specific licences such that winning bidders will pay an amount sufficient to ensure that there is no other bidder or group of bidders prepared to pay more for the licence(s).

73. The additional amount paid for the assignment of specific licences, known as the assignment price, is calculated for the package of licences assigned in a given assignment round and not for each individual licence. The assignment price for each winning assignment stage bid will be no greater than the corresponding winning bid amount; however, given the pricing rule, it is likely that the assignment price will be less than the winning bid amount and could even equal zero. As there will be multiple assignment rounds, an individual bidder may have multiple assignment prices. The final price paid by a bidder is equal to the bidder’s base price plus the sum of all associated assignment prices. If the sum of a bidder's assignment prices is zero, then its final price will be equal to its base price, determined at the end of the allocation stage.

74. Industry Canada is proposing to apply bidder-optimal core prices and to use a “nearest Vickrey” approach to determine assignment prices. Further information on the determination of assignment prices can be found in Annex G.

15. Restrictions in the Assignment Stage

75. Industry Canada is proposing that the assignment options be limited such that if there is more than one unallocated licence in a product, the unallocated licences within the product will be retained as a contiguous block. This proposal may affect the specific frequency options available in the assignment rounds and the possibility of obtaining the same blocks of spectrum across service areas.

76. Industry Canada will decide on the process for submitting assignment bids. Details concerning the process for submitting bids in the assignment stage will be included in the final licensing framework.

16. Information After each Assignment Round

77. After each assignment round, Industry Canada will determine the winning assignment bids and the assignment prices for the given round. Each bidder in the assignment round will be informed of the specific licences it was assigned in the given round and the associated assignment price.

17. Final Price

78. At the end of the assignment stage, Industry Canada will determine the final price to be paid by each winning bidder. The final price to be paid by a winning bidder is equal to the bidder’s base price for its generic licences plus the sum of the assignment price(s) associated with the bidder’s specific licence assignments.

18. Information at the End of the Auction

79. Industry Canada is proposing to make the following information publicly available following the conclusion of the auction:

• the list of winning bidders, licences won and final prices to be paid;
• the bid submitted by each bidder in every clock round, including the bidder’s identity;
• the supplementary bids submitted by each bidder, including the bidder’s identity; and
• the assignment bids submitted by each bidder, including the bidder’s identity.

Annex E — Example of the Proposed Activity Rules

1. For the purposes of this example, only two products will be considered: product X and product Y. Suppose that product X contains two generic licences in it, X1 and X2, each with an eligibility of 50 points, and that product Y contains two generic licences, Y1 and Y2, each with an eligibility of 25 points.

2. A single bidder, Bidder A, would like to obtain two licences of X1/X2. This package will be denoted as (2, 0). However, if the price of the package with two licences of X1/X2 exceeds the price of a package with one X1/X2 licence and one Y1/Y2 licence by more than $500,000, then Bidder A would prefer a package with one X1/X2 licence and one Y1/Y2 licence, denoted as package (1, 1).

3. Eventually, if the prices become too high, Bidder A will be unable to afford two licences and will need to reduce its demand to one licence. In this case, Bidder A again prefers one licence from X1/X2, but will switch to one Y1/Y2 licence if the price of one X1/X2 licence, denoted as package (1, 0), exceeds the price of one Y1/Y2 licence, denoted as package (0, 1) by more than $500,000.

4. Bidder A’s total budget is $2,800,000. If the price of obtaining two licences becomes greater than this, Bidder A must reduce its demand to one licence.

Round 1

5. In Round 1, the opening bid prices are announced; the opening bid price for X1/X2 is $1,000,000 per licence, and for Y1/Y2, it is $600,000 per licence. The price of a package with two X1/X2 licences is $2,000,000, whereas the price of a package with one X1/X2 licence and one Y1/Y2 licence is $1,600,000 (a price difference of $400,000). As Bidder A prefers two X1/X2 licences unless the price difference is greater than $500,000, Bidder A will bid for two X1/X2 licences, package (2, 0):

Round 2

6. In Round 1, several other bidders shared Bidder A’s preference for X1/X2, whereas few bidders bid on Y1/Y2. As a result, the prices in Round 2 are $1,200,000 for X1/X2 and $650,000 for Y1/Y2. The price for a package with two X1/X2 licences is $2,400,000, whereas the price for a package with one X1/X2 licence and one Y1/Y2 licence is $1,850,000 (a price difference of $550,000). As Bidder A prefers one X1/X2 licence and one Y1/Y2 licence when the price difference is greater than $500,000, Bidder A now bids on one licence of each category, package (1, 1), thereby reducing eligibility from 100 to 75 points.

Round 3

7. In Round 2, the low price of Y1/Y2 caused many bidders to switch demand to that category. As a result, the price of Y1/Y2 increased at a faster rate than the price of X1/X2. The Round 3 prices are $1,250,000 for X1/X2 and $800,000 for Y1/Y2. The price for a package with two X1/X2 licences is $2,500,000, whereas the price for a package with one X1/X2 licence and one Y1/Y2 licence is $2,050,000. This price difference is only $450,000, so Bidder A would prefer to switch back to bidding on two X1/X2 licences, package (2, 0).

8. Using only an eligibility point activity rule, switching back at this point would be impossible because Bidder A would no longer have enough eligibility to bid for a package worth 100 points. This limitation could have the effect of creating a disincentive for Bidder A to bid on its most favourable package in Round 2. Bidder A would have needed to bid on a less profitable package in order to maintain its eligibility for as many rounds of the auction as possible.

9. With a revealed preference/eligibility point hybrid activity rule, however, Bidder A is free to switch back as long as the package satisfies revealed preference with respect to each prior eligibility point reducing round:

10. In order to place a bid with eligibility points greater than its current eligibility (75 points), Bidder A must meet the revealed preference constraint with respect to each prior eligibility-reducing round. In this case, the only eligibility-reducing round is Round 2, where Bidder A decreased its eligibility from 100 points to 75 points. In other words, in order for Bidder A to be able to switch its bid from (1, 1) to (2, 0), the (2, 0) package had to become relatively cheaper than the (1, 1) package. Mathematically, the revealed preference constraint is stated as follows, where R refers to the round:

(Price of (2, 0) in R3) – (Price of (2, 0) in R2) ≤ (Price of (1, 1) in R3) – (Price of (1, 1) in R2)
($2,500,000 – $2,400,000) ≤ ($2,050,000 – $1,850,000)
$100,000 ≤ $200,000

11. The price of package (2, 0) increased by $100,000 from Round 2 to Round 3, whereas the price of package (1, 1) increased by $200,000. Therefore, the constraint is satisfied and Bidder A is permitted to place the bid for the package (2, 0).

Round 4

12. In Round 4, the price of X1/X2 increases to $1,400,000, whereas the price of Y1/Y2 increases to $1,000,000. The price for a package with two X1/X2 licences is $2,800,000, whereas the price for a package with one X1/X2 licence and one Y1/Y2 licence is $2,400,000. This price difference is only $400,000 so Bidder A prefers the same package as in Round 3:

13. Bidder A’s eligibility is still only equal to 75, so it must meet the revealed preference constraint in order to place this bid. As before, the requirement is that the (2, 0) package needs to be relatively cheaper than the (1, 1) package (as compared to Round 2):

(Price of (2, 0) in R4) – (Price of (2, 0) in R2) ≤ (Price of (1, 1) in R4) – (Price of (1, 1) in R2)
($2,800,000 – $2,400,000) ≤ ($2,400,000 – $1,850,000)
$400,000 ≤ $550,000

14. This constraint continues to be satisfied, that is, the price of the package (2, 0) increased by $400,000 which is no more than the increase in the price of the package (1, 1) from Round 2 to the current round, Round 4, which is $550,000. Bidder A is permitted to place this bid for the package (2, 0).

Round 5

15. In Round 5, the price continues to increase on both products, with X1/X2 at $1,650,000 and Y1/Y2 at $1,200,000. As a result, both two-licence combinations, (2, 0) and (1,1) now exceed Bidder A’s budget of $2,800,000. Bidder A must decrease its demand to one licence. As the price of X1/X2 ($1,650,000) is $450,000 greater than the price of Y1/Y2 ($1,200,000), Bidder A places a bid for one X1/X2 licence, package (1, 0), given that Bidder A prefers one X1/X2 licence when the price of one X1/X2 licence exceeds the price of one Y1/Y2 licence by less than $500,000.

16. This bid further reduces Bidder A’s eligibility to 50 points. Bidder A is within its eligibility of 75 points, so there are no revealed preference constraints on this bid.

Round 6

17. In Round 6, the price on X1/X2 increases at a faster rate, increasing the price difference to $550,000, which is greater than the $500,000 threshold. Bidder A thus switches its bid to one Y1/Y2 licence, package (0, 1) as Bidder A prefers one Y1/Y2 licence when the price of one X1/X2 licence exceeds the price of one Y1/Y2 licence by more than $500,000. This bid further reduces Bidder A’s eligibility to 25 points:

Round 7

18. In Round 7, the price on Y1/Y2 increases at a faster rate than X1/X2. At Round 7 prices, Bidder A prefers one X1/X2 licence, as the price of one X1/X2 licence exceeds the price of one Y1/Y2 licence by less than $500,000, causing Bidder A to again desire to switch:

19. In order to place this bid, Bidder A must satisfy revealed preference with respect to every round in which it has reduced its eligibility. Bidder A reduced its eligibility in Round 2, Round 5 and Round 6. It is helpful to summarize the prices and bids placed up to this point:

20. The constraints are as follows:

Constraint with respect to Round 2

(Price of (1, 0) in R7) – (Price of (1, 0) in R2) ≤ (Price of (1, 1) in R7) – (Price of (1, 1) in R2)
($1,850,000 – $1,200,000) ≤ ($3,250,000 – $1,850,000)
$650,000 ≤ $1,400,000

21. The price of the package (1, 0) increased by $650,000 from Round 2 to the current round, Round 7, which is no more than the increase in the price of package (1, 1), $1,400,000, where package (1, 1) is the package that Bidder A bid on in Round 2.

Constraint with respect to Round 5

(Price of (1, 0) in R7) – (Price of (1, 0) in R5) ≤ (Price of (1, 0) in R7) – (Price of (1, 0) in R5)
($1,850,000 – $1,650,000) ≤ ($1,850,000 – $1,650,000)
$200,000 ≤ $200,000

22. The price of the package (1, 0) increased by $200,000 from Round 5 to the current round, Round 7, which is no more than the increase in the price of the package (1, 0), where the package (1, 0) is the package that Bidder A bid on in Round 5.

Constraint with respect to Round 6

(Price of (1, 0) in R7) – (Price of (1, 0) in R6) ≤ (Price of (0, 1) in R7) – (Price of (0, 1) in R6)
($1,850,000 – $1,800,000) ≤ ($1,400,000 – $1,250,000)
$50,000 ≤ $150,000

23. The price of the package (1, 0) increased by $50,000 from Round 6 to the current round, Round 7, which is no more than the increase in the price of the package (0, 1), where the package (0, 1) is the package that Bidder A bid on in Round 6.

24. All three revealed preference constraints are satisfied, so Bidder A is permitted to place this bid.

Supplementary Round

25. In the bidding of Round 7, the aggregate demand drops sufficiently that the clock rounds conclude, making Round 7 the final clock round. Bidder A is in the position of having a final clock package of one X1/X2 licence. Note that if there had only been an eligibility point activity rule in the clock stage, Bidder A would likely have, instead, a final clock package of one Y1/Y2 licence, a less desirable package.

26. With the revealed preference limit, Bidder A is now guaranteed to win its final clock package if all licences are sold in the clock rounds of the auction. If there are some unallocated licences in the final clock round, Bidder A can still guarantee winning its final clock package by submitting a bid, increasing the dollar amount by at least the final clock price of those unallocated licences minus the opening bid prices of the unallocated licences. This guarantee may be compromised if all other supplementary bids do not include at a minimum, all licences contained in the bidder’s final clock package.

27. Now, suppose that Bidder A wishes to increase its bid on the package (1, 1) ( i.e. one X1/X2 licence and one Y1/Y2 licence) to its maximum budget of $2,800,000. This package is larger than Bidder A’s final clock package in terms of eligibility points. Therefore, Bidder A must satisfy revealed preference with respect to its final clock package, as well as with respect to each eligibility-reducing round beginning with the last round in which Bidder A had sufficient eligibility to bid on the package (1, 1), i.e. beginning with Round 5. Therefore, Bidder A’s supplementary bid for the package (1, 1) must meet the revealed preference conditions with respect to Round 5, Round 6 and Round 7.

28. The revealed preference constraints are as follows, starting with the final clock package constraint:

Revealed preference with respect to the final clock package

(Sup Bid on (1, 1)) – (Price of (1, 1) in R7) ≤ (Highest Bid on (1, 0)) – (Price of (1, 0) in R7)
(Sup Bid on (1, 1)) ≤ (Highest Bid on (1, 0)) + (Price of (1, 1) in R7) – (Price of (1, 0) in R7)
(Sup Bid on (1, 1)) ≤ $1,850,000 + $3,250,000 – $1,850,000
(Sup Bid on (1, 1)) ≤ $3,250,000

Revealed preference with respect to Round 6

(Sup Bid on (1, 1)) – (Price of (1, 1) in R6) ≤ (Highest Bid on (0, 1)) – (Price of (0, 1) in R6)
(Sup Bid on (1, 1)) ≤ (Highest Bid on (0, 1)) + (Price of (1, 1) in R6) – (Price of (0, 1) in R6)
(Sup Bid on (1, 1)) ≤ $1,250,000 + $3,050,000 – $1,250,000
(Sup Bid on (1, 1)) ≤ $3,050,000

Revealed preference with respect to Round 5

(Sup Bid on (1, 1)) – (Price of (1, 1) in R5) ≤ (Highest Bid on (1, 0)) – (Price of (1, 0) in R5)
(Sup Bid on (1, 1)) ≤ (Highest Bid on (1, 0)) + (Price of (1, 1) in R5) – (Price of (1, 0) in R5)
(Sup Bid on (1, 1)) ≤ $1,850,000 + $2,850,000 – $1,650,000
(Sup Bid on (1, 1)) ≤ $3,050,000

29. Thus, Bidder A’s supplementary bid on the (1, 1) package is most constrained by the revealed preference constraints relative to rounds 5 and 6. In this case, the constraining amount is $3,050,000, allowing Bidder A to place the $2,800,000 bid.

Revealed Preference Constraints for the (0, 1) Package

30. The (0, 1) package is also subject to revealed preference constraints. These are based on the packages in each eligibility-reducing round beginning with the last round in which Bidder A had sufficient eligibility to bid on the (0, 1) package, as well as in the final clock round. In this example, the last round in which Bidder A had sufficient eligibility to bid on the (0, 1) package was Round 7, which is also the final clock round. So, the only constraint on the bid for the (0, 1) package is:

(Sup Bid on (0, 1)) – (Price of (0, 1) in R7) ≤ (Highest Bid on (1, 0)) – (Price of (1, 0) in R7)
(Sup Bid on (0, 1)) ≤ (Highest Bid on (1, 0)) + (Price of (0, 1) in R7) – (Price of (1, 0) in R7)
(Sup Bid on (0, 1)) ≤ $1,850,000 + ($1,400,000 – $1,850,000)
(Sup Bid on (0, 1)) ≤ $1,400,000

31. So, without any supplementary bids placed on the final clock package, the highest supplementary bid that Bidder A can place on the (0, 1) package is $1,400,000 because Bidder A bid $1,850,000 for (1, 0) in the final clock round. However, if for example Bidder A places a supplementary bid on its final clock package of $2,300,000, then Bidder A may also place a supplementary bid on the (0, 1) package of up to $1,850,000.

Annex F — Algebraic Description of Proposed Revealed Preference Activity Rules in the Clock Rounds and the Supplementary Round

Revealed Preference in the Clock Rounds

1. The activity rule in the clock rounds allows for a bidder to always be able to place a bid on any package that is within the bidder’s current eligibility. As well, in any round, the bidder can bid on a larger package than would be permitted by the bidder’s current eligibility provided that the package satisfies revealed preference with respect to each prior eligibility-reducing round. However, bidding on a larger package does not increase the bidder’s eligibility in subsequent rounds. A bidder will never be allowed to place a bid on a package that exceeds its initial eligibility.

2. A product refers to a particular category in a given service area. Industry Canada is proposing two categories of licences, paired and unpaired, with two categories in Region A (43 service areas), one category in Region B (16 service areas) and two categories in Region C (two service areas). In total 106 products will be available in the 2500  MHz auction.

Region A — 86 products

• blocks C/C’ to G/G’ (five generic licences of 10 + 10 MHz);
• block I (one licence of 25 MHz);

Region B — 16 products

• blocks E/E’ to G/G’(three generic licences of 10 + 10 MHz);

Region C — 4 products

• blocks A/A’ to B/B’ and E/E’ to G/G’ (five generic licences of 10 + 10 MHz); and
• block H (one licence of 25 MHz).

3. A package in clock round \(t\) satisfies revealed preference with respect to an earlier clock round \(s\) for a given bidder if the bidder’s package \(Q_{t}\) has become relatively less expensive than the package on which the bidder bid in clock round s, Q_s, as the clock prices have progressed from the clock prices in clock round s to the clock prices in clock round \(t\). Algebraically, the revealed preference constraint is the condition that:

\[ \sum_{i=1}^m (Q_{t,i}× (P_{t,i} − P_{s,i})) \le \sum_{i=1}^m (Q_{s,i}× (P_{t,i} − P_{s,i})) \]

where:

“i” indexes the products;

“m” is the number of products, where the maximum number of products proposed for the 2500 MHz auction is 106;

Q_t,i is the quantity of the i^th product bid in clock round t;

Q_s,i is the quantity of the i^th product bid in clock round s;

P_t,i is the clock price of the i^th product bid in clock round t; and

P_s,i is the clock price of the i^th product bid in clock round s.

4. A bidder’s package, Q_t, of clock round t is consistent with revealed preference in the clock rounds if it satisfies the revealed preference constraint with respect to all eligibility-reducing rounds prior to clock round t for the given bidder.

Revealed Preference in the Supplementary Round

5. There is no limit on the supplementary bid amount for the final clock package. The activity rule in the supplementary round states that all supplementary bids must satisfy the revealed preference limit with respect to the final clock round regardless of whether the supplementary bid package is larger or smaller than the final clock package.

6. In addition, supplementary bids on packages that are larger than the final clock package must satisfy the revealed preference limit with respect to each eligibility-reducing round, beginning with the last round in which the bidder had sufficient eligibility to bid on the package, unless the increase in package size is due to placing bids on unallocated licences, where unallocated licences are those licences where supply is greater than aggregate demand in the final clock round.

7. Let Q denote the package on which the bidder wishes to place a supplementary bid. Let Q_s denote the package on which the bidder bid in clock round s and let B_s denote the bidder’s highest dollar amount bid in the auction for package Q_s, whether the highest dollar amount was placed in a clock round or a supplementary round.

8. A supplementary bid, B, for the package Q satisfies the revealed preference limit with respect to a clock round s, if B is less than or equal to the highest dollar amount bid on the package bid in clock rounds, that is, B_s plus the price difference in the respective packages, Q and Q_s, using the clock prices of clock round s. Algebraically, the revealed preference limit is the condition that:

where:

“i” indexes the products;

“m” is the number of products;

Q_i is the quantity of the i^th product in the package Q;

Q_s,i is the quantity of the i^th product in the package Q_s of clock round s;

P_s,i is the clock price of the i^th product in clock round s;

B is the dollar amount of the supplementary bid for the package Q; and

B_s is the highest dollar amount bid on package Q_s either in a clock round or in the supplementary round.

9. In addition, for supplementary bid package Q, let T(Q) denote the last clock round in which the bidder’s eligibility was at least the number of eligibility points associated with the package Q.

10. A given bidder’s collection of supplementary bids is consistent with the revealed preference limit if the supplementary bid for the package Q, with a dollar amount, B, for the given bidder satisfies the following conditions:

• (a) for a package Q, comprising the entire final clock package plus any or all licences that are provisionally unallocated to any bidder in the final clock round, the dollar amount, B, must satisfy the revealed preference limit, as specified in paragraph 8, with respect to the final clock round only; note that this places no constraint on the dollar amount of a supplementary bid for the final clock package;
• (b) for any package Q, comprising other than the entire final clock package plus any or all licences that are provisionally unallocated to any bidder in the final clock round, the dollar amount B must satisfy the revealed preference limit, as specified in paragraph 8 with respect to the final clock round and with respect to every eligibility-reducing round equal to T(Q) or later.

11. Note that, in the application of paragraph 8, the package Q_s may itself be subject to a revealed preference limit with respect to another package. Thus, the rule may have the effect of creating a chain of constraints on the dollar amount of a supplementary bid for a package Q relative to the dollar amounts of other clock bids or supplementary bids.

12. See Annex E for an example of the revealed preference activity rules.

Annex G — Proposed Pricing Rule

1. Prices are determined at two points in the auction: first at the end of the allocation stage to determine the base prices, which are the minimum that winning bidders will pay for their winning packages; and second, at the end of the assignment stage to determine the incremental payments for specific licences, known as assignment prices. Industry Canada is proposing to use a second-price rule to determine the prices to be paid by winning bidders. More specifically, Industry Canada proposes to apply bidder-optimal core prices and to use the "nearest Vickrey" approach in determining both the base prices and the assignment prices. The final price paid by a winning bidder is the sum of the base price and the assignment price(s).

Base Prices

2. Each winning allocation stage bid has an associated price for the package of licences contained within the bid, known as the base price. A separate base price is determined for each winning bidder.

3. Industry Canada is proposing the use of a second-price rule to calculate base prices such that the base price for a winning bidder will be at least the opening bid price, but no higher than the actual amount bid. Second prices are often referred to as Vickrey prices and represent the opportunity cost of the bidder winning the package.

4. The Vickrey price for each winning Bidder J is calculated as follows. First, from the value of the winning combination of packages (see paragraph 57, Annex D), subtract Bidder J’s winning bid (value A). Next, recalculate the winning combination of packages in the hypothetical situation where all Bidder J’s bids are excluded, as if Bidder J had not participated in the auction (value B). The Vickrey price for Bidder J is defined as the value of the winning combination of packages with all Bidder J’s bids excluded (value B) minus the sum of the winning allocation stage bids for all bidders other than Bidder J (value A), that is, B – A.

5. An extra payment beyond the Vickrey prices is sometimes required as a result of complementarities. In the event that an extra payment is required, the payment to be made will be adjusted proportionate to the size of the bidder’s package as measured by the bidder’s winning package evaluated at the opening bid prices.

6. The set of base prices for the winning allocation stage bids must satisfy the following conditions:

• (a) First condition: The base price for a winning allocation stage bid must be greater than or equal to the opening bid prices for the licences included in the package associated with the winning bid, but not more than the dollar amount of the winning bids.
• (b) Second condition: The set of base prices must be sufficiently high that there is no alternative bidder, or group of bidders prepared to pay more than any winning bidder or group of winning bidders. If there is only one set of base prices that meet the first and second conditions, this determines the base prices for the allocation stage.
• (c) Third condition: If there are many sets of base prices that fulfil the first and second condition, the set(s) of base prices that minimize(s) the sum of base prices across winning bidders is selected. If there is only one set of base prices satisfying these three conditions, this determines the base prices for the allocation stage.
• (d) Fourth condition: If there is more than one set of base prices that satisfy the first three conditions, the set of base prices that minimize the weighted sum of squares of differences between the base prices and the Vickrey prices will be selected. The weighting is relative to the price of the bidder’s package evaluated at the opening prices. This approach for selecting among sets of base prices that minimize the sum of base prices across winning bidders is referred to as the “nearest Vickrey” approach.

7. These conditions characterize a unique set of base prices such that each winning bidder pays no more than the dollar amount of its winning bid and pays at least the aggregate value of the opening bid prices for the package of licences.

8. A software algorithm will be used to determine the set of base prices that meets the conditions outlined above.

9. The following is an example of how base prices are calculated. This example is based on the 2012 Spectrum Auction Design paper by P. Cramton (http://www.cramton.umd.edu/papers2005-2009/cramton-spectrum-auction-design.pdf).

10. Suppose that there are five bidders, 1, 2, 3, 4, 5, bidding for two licences, A and B. The following bids are submitted (“b” designates the bidder):

b₁{A} = $28

b₂{B} = $20

b₃{ AB } = $32

b₄{A} = $14

b₅{B} = $12

11. The bids of the five bidders are represented in Figure G1.

12. In this example, the highest value combination of bids would assign licence A to Bidder 1 and licence B to Bidder 2, generating $48 in value. There is no other assignment of the licences that yields a higher value.

13. To calculate the Vickrey price for Bidder 1, Bidder 1’s bid is removed. The best assignment without Bidder 1 assigns licence A to Bidder 4 at $14 and licence B to Bidder 2 at $20, resulting in $34. The sum of the winning bids for all bidders other than Bidder 1 is $20 ($48 – $28). Thus, the Vickrey price for Bidder 1 is $14 ($34 – $20). Similarly, if Bidder 2’s bid is removed, then the best assignment is to assign licence A to Bidder 1 and licence B to Bidder 5, resulting in a value of $40. The sum of the winning bids for all bidders other than Bidder 2 is $28 ($48 – $20). Thus, the Vickrey price for Bidder 2 winning B is $12 ($40 – $28).

14. Hence, the Vickrey outcome is for Bidder 1 to pay $14 for licence A and for Bidder 2 to pay $12 for licence B. Total revenues with these payments are $14 + $12 = $26. As shown in Figure G1, this means that Bidder 1 can reduce its bid to $14 before being displaced by Bidder 4. Similarly, Bidder 2 can reduce its bid to $12 before being displaced by Bidder 5.

15. The problem is that these payments sum to $26, which less than Bidder 3’s bid of $32 for both licences A and B. Therefore, Bidder 1 and Bidder 2 must split an additional payment of $6 ($32 – $26), to ensure that their combined payment is greater than that of Bidder 3, satisfying the condition that no other bidder or group of bidders were prepared to pay more for the licences in question. That is, Bidder 1 and Bidder 2 must pay, collectively, at least $32.

Figure G1 — Example of Calculating Base Prices

16. If the opening bid prices for licence A and licence B are the same amount, the additional payment of $6 is split equally between the two bidders. Each bidder is therefore paying an additional $3 above its Vickrey price, with Bidder 1 paying $17 ($14 + $3) and Bidder 2 paying $15 ($12 + $3), as shown in Figure G1. However, if the opening bid prices for the two licences are different amounts, the two bidders must split the extra payment proportionately, in reference to the opening bid amounts (the fourth condition). For example, if the opening bid price for licence A is $8 and the opening bid price for licence B is $4, then the opening bid price of Bidder 1’s package is twice as large as that of Bidder 2. Therefore, Bidder 1 would pay twice as much as Bidder 2 of the extra payment, with Bidder 1 paying an additional $4, for a total payment of $18 and Bidder 2 paying an additional $2, for a final payment of $14.

Assignment Prices

17. The assignment stage will consist of a sequence of assignment rounds. Industry Canada proposes to run product-by-product assignment rounds, in descending order of the populations of the associated service areas, conducting a separate assignment round for each product, where necessary. This process would enable bidders to know which specific frequencies they have won in the most populated service areas before they participate in the assignment rounds for the adjacent, less populated service areas. However, two or more products would be aggregated into a single assignment round if all of the following criteria are met: the products are in the same region (i.e. Region A, Region B or Region C); their service areas form a contiguous geographic area; and the winners, and the number of generic licences they have won are sufficiently similar across service areas, according to predefined criteria.

18. The assignment bid is a package bid for the specific frequency locations of all licences being assigned within the round. The assignment prices will be determined from the set of assignment stage bids for the products being assigned in that round.

19. Industry Canada is proposing to use a second-price rule to calculate assignment prices. The assignment price is attributable to the entire collection of licences assigned in a given assignment round and not to individual licences that comprise the package.

20. For the purpose of calculating assignment prices, the Vickrey price for each winning Bidder J is calculated as follows. First, from the value of the winning combination of assignment bids (see paragraph 71, Annex D), subtract Bidder J’s winning bid (value A). Next, recalculate the winning combination of assignment bids in the hypothetical situation where all Bidder J’s assignment bids are equal to zero, as if Bidder J did not have a preference for any of the assignment options it was presented in the round (value B). The Vickrey price for Bidder J is defined as the value of the winning combination of assignment bids with all Bidder J’s bids set to equal zero (value B) minus the sum of the winning assignment bids for all bidders other than Bidder J (value A), that is, B - A.

21. The assignment stage prices for each winning assignment bid in a given assignment round must satisfy the following conditions:

• (a) First condition: The assignment prices must be positive or zero and not more than the dollar amount of the winning assignment stage bid.
• (b) Second condition: The set of assignment prices must be sufficiently high that there is no alternative combination of valid assignment bids that sum to more than the winning assignment bids. If there is only one set of assignment prices that satisfies the first two conditions, this determines the assignment prices.
• (c) Third condition: If there are many sets of assignment prices that fulfil the first and second conditions, the set(s) of assignment prices that minimize(s) the sum of assignment prices across winning assignment stage bids is selected. If there is only one set of assignment prices that satisfies these three conditions, this determines the assignment prices.
• (d) Fourth condition: If there are many sets of assignment prices that satisfy the first three conditions, the set of assignment prices that minimizes the weighted sum of squares of differences between the assignment prices and the Vickrey prices will be selected. The weighting is relative to the price of the bidder’s package evaluated at the opening prices. This approach for selecting among sets of assignment prices that minimize the sum of assignment prices across winning assignment bids is referred to as the “nearest Vickrey” approach.

22. A software algorithm will be used to determine the set of assignment prices that meet the conditions outlined above.

Annex H — Glossary

Annex I — Summary of the Proposals for Consideration

Proposals presented on a licensing framework for Broadband Radio Service (BRS) in the 2500 MHz band.

Proposals related to the service area for Lloydminster (Alberta/Saskatchewan)

3-1 Industry Canada is seeking comments on whether or not the service area boundary for licences in the 2500 MHz band should deviate from the provincial boundary around the City of Lloydminster, (Alberta/Saskatchewan).

Proposals related to the auction format and rules

4-1 Industry Canada is seeking comments on its proposal to use the CCA format, as well as the general attributes outlined above, including:

• (a) the products available for auction, including the categorization of generic licences;
• (b) the use of product-specific stages in the assignment round, ordered by population;
• (c) the combined eligibility point and revealed preference activity rule in the clock rounds, and the revealed preference limit in the supplementary round;
• (d) the use of a second-price rule;
• (e) the information to be disclosed during, and post-auction;
• (f) the guarantee of contiguity for generic licences won within a product; and
• (g) the contiguity of blocks retained by Industry Canada.

Proposals related to bidder participation

5-1 Industry Canada is seeking comments on its proposed changes to the definition and rules related to associated entities. Specifically, comments are sought on:

• (a) the types of agreements that should be captured under the definition of associated entities;
• (b) the level of information to be disclosed to the public prior to the auction;
• (c) the provision that typical roaming and tower sharing be specifically excluded from the revised definition of associated entities and whether other types of agreements such as the purchase of backhaul capacity should be deemed excluded;
• (d) the proposal that entities that are deemed associated entities may apply to be treated as separate entities for participation in the auction;
• (e) the proposal that associated entities may request to have the spectrum aggregation limit apply to them separately, based on an analysis of their association and of whether they intend to compete in the same licence service area;
• (f) the criteria to be considered in determining whether the entities are competing; and
• (g) the proposal that no changes be made to the affiliated entities rule.

5-2 Industry Canada is seeking comments on the rules prohibiting collusion that would apply to bidders in the 2500 MHz auction.

Proposals related to the conditions of licence for spectrum licences to be auctioned in the 2500 MHz band

6-1 Industry Canada is seeking comments on its proposal to issue spectrum licences in the 2500 MHz band with a 20-year licence term.

6-2 Industry Canada is seeking comments on the proposed wording of the condition of licence related to the spectrum aggregation limit.

6-3 Industry Canada is seeking comments on the proposed wording of the condition of licence related to transferability and divisibility.

6-4 Industry Canada is seeking comments on the proposed wording of the condition of licence related to eligibility criteria.

6-5 Industry Canada is seeking comments on the proposed wording of the condition of licence related to the treatment of existing spectrum users.

6-6 Industry Canada is seeking comments on the proposed wording of the condition of licence related to radio station installations.

6-7 Industry Canada is seeking comments on the proposed wording of the condition of licence related to the provision of technical information.

6-8 Industry Canada is seeking comments on the proposed wording of the condition of licence related to compliance with legislation, regulation and other obligations.

6-9 Industry Canada is seeking comments on the proposed wording of the condition of licence related to technical considerations, and international and domestic coordination.

6-10 Industry Canada is seeking comments on the proposed wording of the condition of licence related to lawful intercept requirements.

6-11 Industry Canada is seeking comments on the proposed condition of licence related to the research and development requirement.

6-12 Industry Canada is seeking comments on the application of the general deployment condition of licence as stated above. Specifically, comments are sought on:

• (a) the population coverage, as specified in Table 4, for each licence service area; and
• (b) the time frame proposed.

6-13 Industry Canada is seeking comments only on the proposed wording of the condition of licence related to mandatory antenna tower and site sharing.

6-14 Industry Canada is seeking comments only on the proposed wording of the condition of licence related to mandatory roaming.

6-15 Industry Canada is seeking comments on the proposed condition of licence related to the requirement for annual reporting.

Proposals related to the conditions of licence for existing BRS licensees in the 2500 MHz band

7-1 Industry Canada is seeking comments on the proposed wording of the condition of licence related to the treatment of existing spectrum users for the existing BRS licensees.

7-2 Industry Canada is seeking comments on the proposed wording of the condition of licence related to the spectrum aggregation limit for existing BRS licensees.

7-3 Industry Canada is seeking comments on the proposed wording of the condition of licence related to transferability and divisibility for existing BRS licensees.

7-4 Industry Canada is seeking comments on the proposed wording of the condition of licence related to eligibility criteria for existing BRS licensees.

7-5 Industry Canada is seeking comments on the proposed condition of licence related to technical considerations, and international and domestic coordination for existing BRS licensees.

7-6 Industry Canada is seeking comments on the proposed wording of the condition of licence related to lawful intercept requirements for existing BRS licensees.

Proposals related to the auction process

8-1 Industry Canada is seeking comments on the proposed opening bids as presented in Table 5.

8-2 Industry Canada is seeking comments on the proposed eligibility points for spectrum licences in the 2500 MHz band, as outlined in Table 6.

8-3 Industry Canada is seeking comments on the proposed pre-auction deposits as outlined above.

Proposals related to the licence renewal process

11-1 Industry Canada is seeking comments on the proposed renewal process for spectrum licences in the 2500 MHz band.