Estimating private costs in a descending clock auction: The FCC’s rural digital opportunity fund

Abstract

In the United States, the Federal Communications Commission (FCC) distributes subsidies to broadband providers to offer high-speed broadband in unserved areas. This article examines the FCC’s largest program to date, the 2020 Rural Digital Opportunity Fund (RDOF) auction, which distributed billions of dollars and replaced a subsidy mechanism based on engineering cost estimates. I propose a novel model to estimate the private costs of an incumbent wireline provider in areas adjacent to the incumbent’s existing infrastructure. In the model, the incumbent bids for each area up to their private cost, whereas rival bidders include entrant providers that solve a dynamic bidding problem accounting for fixed and interconnection costs. I apply the model to a major incumbent in the RDOF. The findings show that the incumbent received modest rents, almost 70% lower than under the engineering cost estimates.