The impact of short-term permits on competition in unlicensed spectrum

Motivated in part by the success of WiFi, there is much interest in expanding the amount of spectrum available for unlicensed access, even at lower 'prime' frequencies. Having easy access to new spectrum can provide a means of increasing competition in the wireless service market and promote the development of new technologies. On the other hand, potential risks are that such spectrum may have a higher risk of becoming congested and can make it more difficult for service providers (SPs) to differentiate their services from each other. Indeed, several papers have shown that when SPs compete on price in such a setting, the price can get competed to zero. This may lead to SP's being unwilling to invest and offer service. Here, we consider a different market structure, in which SPs must buy short-term permits from a regulator in order use the spectrum band. We argue that under such an approach, the SPs are better modeled as competing on quantity (number of permits) instead of price. We analyze a model for such a market and show that in this case, multiple SPs can maintain a non-zero profit. Moreover, there is a range of bandwidth over which this achieves a higher welfare than price competition even accounting for the additional permit cost charged to the SPs.