Use It or Save It? Idle Spectrum and Entry Deterrence

When a wireless carrier exits, its spectrum may remain idle until regulators complete a reassignment process. During this interval, regulators must decide whether to leave the spectrum unused or grant temporary access rights to an incumbent carrier. We study this trade-off in a two-period model in which temporary spectrum access lowers the incumbent’s marginal cost before entry is possible, while consumers who purchase in the first period become locked in through multi-period contracts. Under a wait-and-assign policy, the spectrum remains idle in the first period. Under a temporary-transfer policy, the incumbent receives access to the idle spectrum in the first period but gives up any cost advantage if entry occurs, as the entrant receives the spectrum and competes on equal-cost terms. Temporary access therefore affects entry incentives only through installed-base accumulation rather than through input foreclosure or a persistent cost advantage. We show that there exists a region of the parameter space in which entry occurs under wait-and-assign but is deterred under temporary transfer. In this region, temporary transfer can increase total welfare because the gains from lower production costs, immediate utilization, and avoided entry costs outweigh the surplus generated by postentry competition. Consumer surplus may also increase when the benefit of offering lower prices to a larger captive customer base exceeds the loss of competition in the residual market.