Optimal licensing contracts under demand uncertainty: An application to Korea’s 3G case

Optimal licensing contracts under demand uncertainty: An application to Korea’s 3G case

This paper deals with the structure of the optimal spectrum charges when firms face financial constraints under substantial demand uncertainty. Using an equilibrium theory, we show that a partial royalty contract can be better under some circumstance than the usual lump-sum contract in terms of social welfare, and the share of royalty payment should increase with the degree of demand uncertainty. We then demonstrate empirical relevance of the predictions using the case of Korea’s 3G spectrum licensing. With a calibration of the case, we find that the government should have better to move some significant portion of the total spectrum charge to royalty rather than the actual fixed-fee only scheme. We discuss some policy implications and a future research agenda.