Course- “Applied Game Theory”

Prof. Dr. Hasan Alkaş

(SS 2015)

Topic: 4G Auction in Turkey

Name: Bidhan Krishna Das Matriculation Number: 18106

Table of Contents
1. Introduction ..................................................................................................................................... 1
2. Aims of the Game............................................................................................................................ 1
3. Theoretical Foundation.................................................................................................................... 2
4. Pre-game Preparation and Modeling ............................................................................................... 3
4.1 Packages, Bandwidth allocations and Price ................................................................................ 3
4.2 Auction procedures ..................................................................................................................... 4
4.3 Players ......................................................................................................................................... 4
4.3.1 Turkcell .................................................................................................................................... 5
4.3.2 Vodafone Turkey ...................................................................................................................... 5
4.3.3 Avea ......................................................................................................................................... 5
4.4 Economic Modeling ..................................................................................................................... 5
5. Structure and Functional Principles of Game ................................................................................. 7
5.1 Bidding Rules .............................................................................................................................. 7
5.2 Budget ......................................................................................................................................... 7
5.3 Personality Profiling and Team Formation ................................................................................. 8
5.3.1 Turkcell .................................................................................................................................... 8
5.3.2 Vodafone Turkey ...................................................................................................................... 8
5.3.3 Avea .......................................................................................................................................... 8
5.4 Expected Outcomes ..................................................................................................................... 9
6. Discussion of the Game Conduct ................................................................................................... 9
7. Post-Game Analysis ..................................................................................................................... 10
7.1 Revenue ..................................................................................................................................... 12
7.2 License Allocation .................................................................................................................... 12
7.3 Budget Utilization ..................................................................................................................... 12
8. Comparison with Benchmark ....................................................................................................... 13
9. Comparison with German LTE Auction ...................................................................................... 14
10. Conclusion ..................................................................................................................................... 14
11. References ..................................................................................................................................... 15
1. Introduction:

Turkey is the world’s 18th largest economy. In 2013 according to the World Bank the GDP
of Turkey was 822.1 billion USD. Per capita income was more than 10,000 USD. Number of
3G service subscribers is almost 58 million (BTK).

Now if we focus on the Turkish telecommunication market then we will realize that, for the
last few years, there was a significant transition period in Turkish telecommunication market.
The fixed line infrastructure and voice services of Türk Telekom were ended at the end of
2003. In 2003 Türk Telekom was privatized. Türk Telekom had also 40 percent shares of
Avea. And later Oger Telecoms took the control of Avea. During that time Türk Telekom
was the most powerful operator. Few years ago its market share was between 80-90 percent
(Kars, 2009). On the other hand in mobile voice telephony Türk Telekom was not incumbent.
The main competitor of Türk Telekom was Turkcell. The market share of Turkcell was about
60 percent in terms of subscribers. Now if we look at the present then we will see that
regarding revenues, 48 percent market share belongs to Turkcell and 29 and 23 percent
market share go to Vodafone and Avea respectively (BTK).

In this paper I will mainly focus on the following parts:

 Pre-auction preparation,
 During auction,
 Post-auction analysis.

2. Aims of the Game:

In the real world auctions are used for many purposes. Examples: for maximizing the
revenue, to discover the price and valuation, for transparency, to foster the competition etc.
(Jehiel and Moldovanu, 2002). For achieving such goals Turkey’s government has decided
that they will sell the 4G license through auction among the four companies including one
new company. They have allocated 800MHz, 900MHz, 1800MHz, 2100MHz, 2600MHz for
the auction.

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3. Theoretical Foundation:

For theoretical foundation firstly I would like to discuss about the spectrum auction. Because
we should know why government organizes auction for spectrum. From different literatures I
get the answer. Because through a competitive auction productive firms get the spectrum
right. It decreases the rent-seeking costs. Finally the most important consequence of a
competitive auction is that, the captured value from license for public, especially it decreases
costly tax distortions. Because government generates fund without imposing the tax (Hazlett,
Muñoz, Avanzini, 2011). As I mentioned before, that maximizing the revenue by auction is
one of the main objectives of government. But scholars warned that it should not be the
overriding objective. Because for maximizing the revenue government can offer a single
monopoly in each region at the higher cost, but in future such revenue maximizing strategy
will not be efficient. It will create inefficiency in telecommunication market.

Many economic papers on spectrum auctions focus not only on the efficiencies of end user
but also on the auction procedures. Because good auction design is the main key for attracting
entry and preventing collusive behavior.

Simultaneous multi-round ascending auction is often considered as a mistake or wrong

selection for auctioneer or authority. Because ascending auctions give chances to bidders to
signal each other. This signal represents the collusive behavior between players. Such auction
procedure can also discourage the weaker player to participate in the auction because weaker
player knows that stronger player can always bid over the weaker player (Klemperer, 2001).

On the other hand, sealed-bid first price auction does not give any opportunity for signaling
which support collusion. In addition, by such auction weaker player is always encouraged to
participate, because weaker player knows it has good chance to win the bid. But the
disadvantage of sealed-bid auction is that the player with lower values can beat the player
with higher values (Klemperer, 2001).

From this analysis regarding types of auction we can say that the auction design should be
depended on designer’s objectives.

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Turkish authority wants to maximize its revenue through the auction and they want
competition in 4G service. For this reason they have made the auction design in such a way
by which they can earn the maximum revenue and they can avoid the monopoly in 4G
service. Furthermore, by such design new player will be encouraged to participate in bidding.
For achieving these goals Turkish authority will use Sealed-bid first price auction.

4. Pre-Game Preparation and Modeling:

4.1 Packages, Bandwidth allocations and Price:

Here, the following table shows the all information regarding packages, bandwidth
allocations and minimum prices of 4G licenses.
Round Bandwidth(MHz) Minimum Price

First 110 522025916

Second 70 460308081

Third 50 503694870

Fourth 35.2 242678101

Fifth 45.6 270089999

Sixth 79.6 309270696

Total 390.4 2308067663 €

According to the allocation and the strategy of Turkish authority the most lucrative and
attractive bandwidths are 110MHz and 50MHz. In this auction new player is not allowed to

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participate in first and third round. Because Turkish authority says that, these bandwidths are
most attractive and expensive packages. The other three existing players have already made
the 4G infrastructure in Turkey. But the new company has to start the business in Turkish
market from nowhere. For this reason it will not be economically efficient for new player to
get those packages.

4.2 Auction procedures:

For maximizing the revenue, for transparency and for increasing the competition among
players government will follow the following procedures.

Firstly, six (6) rounds will take place in auction. Players will bid for 110MHz in first (1st)
round, 70MHz in second (2nd) round, 50MHz in third (3rd) round, 35.2 MHz in fourth (4th)
round, 45.6MHz in fifth (5th) round and final round (6th) will take place for 79.6MHz. The
type of auction will be mainly Sealed-bid first price auction.

4.3 Players:

As I mentioned earlier, four companies will participate in auction including one new entrant.
They are-

 Turkcell
 Vodafone Turkey
 Avea
 New Entrant

Now I will discuss about the players.

48% 23%
29%

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4.3.1 Turkcell:

Turkcell is the incumbent of Turkish telecommunication market. They have total 35 million
customers. Regarding revenue the market share of Turkcell is 48%. In 2008 Turkcell bought
the license of 45MHz for 358 million EUR. The have already tested 4G services in their own
network (BTK).

4.3.2 Vodafone Turkey:

Vodafone is the main competitor of Turkcell. They want to keep the 2nd position in
telecommunication market. They have total 21 million customers. Their market share is 29%
regarding revenue. In 2008 Vodafone bought the license of 35MHz for 250 million EUR.
Their parent company has vast experience in 4G services in Europe (BTK)

4.3.3 Avea:

Avea is one of the weakest player among the three companies in Turkish telecommunication
market. They mainly focus on young people. Avea is the subsidiary of Türk Telekom. They
owned the 30MHz license for 214 million EUR from the 3G auction of 2008. At this moment
16 million customers are getting services from them. In terms of revenue their market share is
almost 23% (BTK).

4.4 Economic Modeling:

There is a situation in auctions with allocative externalities where players do not only care
about their own goods what they get, but they also care about goods of other players. Players
are concerned about others because the auction effects the future structure of market or the
future competition of market by determining how many goods will go to which competitors.
The result of auction influences the future market structure. On the other hand, the expected
future market structure can affect the outcome of auction through the payoff decisions of
players (Jehiel and Moldovanu, 2002).

Now I will use the following model for analyzing the market structure’s effects.

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Suppose there are X number of players or bidders. And Y is the set of auctioned objects. q
represents the partition of set Y. Here each player p is distinguished by πp which is a value
function. Now a payoff given the partition q can be defined as, πp(q).

According to Jehiel –Moldovann, typical or standard auction can face many things. For
example, a) Different allocations under many equilibria. b) There is no need to be allocated
of the goods or objects to the efficient players etc.

Now consider a case where three players will bid for a fourth in a takeover circumstance.
Now think that what will be happened in the market after takeover: each player hopes that if
it wins the competition then it will earn extra profit of π; if player 1 wins then firm 2 will
expect the decrease in profits of α and vice versa. Player 3 also expects that profits of γ will
be reduced but it will be γ<α, if player 1 or 2 wins. But players 1 and 2 can be unaffected if
player 3 wins.

From the above discussion we can say that the efficient buyer is player 3 from the player’s
point of view. Now let us consider a first price sealed-bid auction. Where player 3 wins by
bidding only π. But in another case player 1 or 2 wins by bidding up to π+α. In this case the
winner will suffer a loss of –α. If player 1 and 2 think that they cannot coordinate to let player
3 win, then they will have the incentives not to participate in the auction. Suppose, if player 1
does not participate then player 3 will win because it will bid up to π+γ, while player 2 will
bid up to only π.

Now if we extend our above discussion then we should say that the economic efficiency
should not be considered only on companies’ or firms’ welfare if the allocative externalities
are because of market structure. We should also take the consumer’s surplus into account for
future scenario. To be very specific, there is a risk that some firm will use the auction as
increasing market power instrument which will reduce the consumer’s welfare. On the other
hand if auction design focuses on consumers’ interest then revenue can be decreased. Now
consider an example to analyze these claims.

Suppose, there are two licenses; A and B for bidding. There are two players, i = 1, 2. Each
player is allowed to bid for both A and B licenses. If each player wins the one license then
price competition in the market will be increased. And as a result profits will be reduced. If
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one player i wins both licenses then monopoly profits of that player must be πi. Let us assume
that π1> π2. Then the market structure will not be efficient because it will not be competitive.
And also for the consumers the result will not be efficient. It means total welfare will not be
desirable. Now if each player is restricted to buy only one license then the revenue of auction
will be zero.

Now one question arises that how to make the good auction design. A good auction design
balances the two aspects where market will be economically efficient and government can
earn revenue.

For example there are four licenses for sale. And there are five players. Suppose a player
needs one license. But they can buy 2 licenses. Here two players buy two licenses each, then
the market power will be increased of two players. As a result market will not be efficient and
it will affect the consumers’ welfare.

5. Structure and Functional Principles of Game:

5.1 Bidding Rules:

I have already mentioned that, total six rounds will take place. In every round authority will
use Sealed-Bid First Price Auction. In each and every round bidders have to bid more than
minimum price. Highest bidder will be named as winner for each and every round. Winner of
every round will pay its submitted price. In tie situation coin toss or lottery will be used to
determine the winner. After each round winner will be announced. And new company can’t
participate in 1st and 3rd round.

5.2 Budget:

Turkish authority will emphasize on competition in 4G service alongside with maximum

revenue. For ensuring the competitiveness in 4G market authority has fixed the budget of all
four telecommunication companies before the auction. In the context of Turkish socio-
economic condition government thinks that this budget estimation is not unrealistic and this

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budget will not create any economic inefficiency in the output. Now we will look at the
budget of four companies.

 Turkcell……………………………………………………... 1.4 billion€

 Vodafone Turkey………………………………………….... 1.2 billion€
 Avea………………………………………………………. 900 million€
 New Entrant………………………………………………. 600 million€

5.3 Personality Profiling and Team Formation:

In this 4G license auction four companies will participate. Each team will be consisted of 4 or
5 members.

5.3.1 Turkcell:

CEO of Turkcell, Kaan Terzioğlu will lead Turkcell team. He was the vice president of
Consultancy Services Turkey Operations. He was the team leader of E-Commerce Strategies
for the EMEA region and also sales director of Advanced Technologies for the EMEA
region. Then he became managing director of Technology Marketing Organization for the
EMEA region. Later he was the vice president of Central and Eastern Europe at the Cisco
Systems Brussels branch; (Turkcell Management Team).

5.3.2 Vodafone Turkey:

Vodafone will participate under Serpil Timuray; CEO of Vodafone Turkey. In 1991 she
started her carrier in Procter & Gamble Turkey. Then she joined DanoneSA Tikvesil
Company of DanoneSA. In January 2014 she became CEO of Vodafone Turkey; (Vodafone
Investors).

5.3.3 Avea:

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Rami Aslam, the CEO of Türk Telekom is the team leader of Avea. In 1997 he joined TD
Bank of Canada. Then he joined in Citigroup. In 2013 he started his carrier as a CEO of Türk
Telekom Group; (Avea Senior Management).

5.4 Expected Outcomes:

Turkish government hopes that they will earn maximum revenue through the above
mentioned strategies. Government also expects that packages will be allocated among the all
players and output will be efficient. Before the simulation government has estimated the
expected results.

According to their expectation, Turkcell will try to win first and third round. Vodafone
Turkey will try to win second and fifth round. Avea will mainly focus on sixth round. And
for New entrant winning the fourth round will be economically efficient. Authority hopes that
they will earn 2.43 billion EUR. And they also expect that this auction will be very much
competitive. And the outcomes of the auction will be efficient.

6. Discussion of the Game Conduct:

Finally, the authority has conducted the auction. The auction was based on the above
mentioned rules and procedures. Four companies participated in the auction. Before starting
the auction representative of authority displayed the power point presentation regarding
auction. Then they provided all the information about packages, rules and budgets to all
companies.

In first round, bidding was for the license of 110MHz. New entrant was not allowed to
participate in the first round. The minimum price of that license was 522.025.916 EUR.
According to the rules of sealed-bid first price auction 3 companies submitted their private
values. Among those private values Turkcell was the highest bidder. They submitted 750
million EUR for 110MHz and they won in the first round. Whereas, Vodafone and Avea
submitted 550 and 650 million EUR respectively.

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In second round, companies submitted the price for the license of 70MHz. All companies
participated in the second round including the new entrant. The minimum price was
460.308.081 EUR. Turkcell, Avea and New entrant submitted 470, 550 and 500 million EUR
respectively, but all players were beaten by the highest bidding price of Vodafone. The
submitted price of Vodafone was 803 million EUR.

In third round, again New entrant was not allowed to participate because of the rules. The
bidding was for 50MHz license. Minimum price was 503.694.870 EUR. In this round
Turkcell submitted 620 million EUR, Vodafone submitted 550 million EUR, Avea submitted
675 million EUR. And surprisingly Avea won the license of 50MHz.

In fourth round, players submitted the price for 35.2MHz. The minimum price was
242.678.101 EUR. But in fourth round New entrant didn’t participate. In this round Turkcell,
Vodafone and Avea submitted 520, 300 and 243 million EUR respectively. It was very clear
that Turkcell was also the winner of fourth round for 520 million EUR.

In fifth round the bidding was for 45.6MHz. Turkcell and Avea didn’t bid for this license.
Only two companies submitted their prices. Vodafone submitted 357 million EUR and New
entrant submitted 570 million EUR. And finally by winning this license New entrant has got
the opportunity to enter into the Turkish telecommunication market.

In the sixth and final round, players submitted their prices for 79.6MHz license. Again
Turkcell and Avea didn’t participate in this final round. New entrant also didn’t participate in
this round. Only Vodafone submitted the price and they won the license of 79.6MHz for 397
million EUR.

7. Post-Game Analysis:

Now I will analyze the auction. From the auction we can see that total six rounds were in the
auction. Participants were bidding for 390.4MHz bandwidths. The total minimum price was
2.30 billion EUR.

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In first round three players participated in the game. Players were bidding for 110MHz.
According to Turkish authority, packages in first round were the one of the most attractive
packages. Before the game the strategy of Turkcell was that they will win this round at any
cost. The expectation of authority was same as Turkcell. The total budget of Turkcell was 1.4
billion EUR. And for winning the first round they have fully utilized their budget. They
didn’t take any risk. They submitted 750 million EUR. And this submitted price was more
than the second submitted price. Finally 750 million EUR was more than enough to win the
first round. And authority was satisfied with the overall result of first round.

In second round all players were bidding for 70MHz. Vodafone was interested to win in this
round. For this reason they submitted their private value very aggressively. Their submitted
price was very high. Government also hoped that Vodafone can win in this round. And they
are very happy with this result.

In third round, again New entrant was not allowed to participate. Turkcell was mainly
interested for these packages of third round. For this reason they have submitted 620 million
EUR. But surprisingly Avea submitted 675 million EUR. Authority didn’t hope that these
packages will go to Avea. But they were happy what they have earned.

In fourth round, four companies submitted their prices. Government expected that New
entrant will be owner of the license of 35.2MHz. The minimum price was not too high. It was
242.67 million EUR. But unfortunately New entrant didn’t bid for these packages. Among
the other three players Turkcell submitted very high price that is 520 million EUR. Authority
thinks that this value was over evaluated. But from revenue’s point of view this high price
has generated the high revenue.

In fifth round, Turkcell and Avea didn’t bid for 45.6MHz due to budget limitation.
Government hoped that Vodafone will try to win these packages of this round. For this reason
they submitted 357 million EUR. But after announcing the result it was clearly realized that
357 million EUR was not enough to win the license of 45.6MHz bandwidth. Because already
New entrant submitted 570 million EUR. This submitted price was unexpected for
government. Because they didn’t expect that New entrant will win this round rather than the
fourth round. They think that it can create economic inefficiency in the market.

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In sixth round, Turkcell, Avea and New entrant didn’t participate in the auction. Only
Vodafone submitted the price of 397 million. And they won the license of 79.6MHz. But
government thought Avea will win this round.

7.1 Revenue:

Now I will analyze the revenue. Before the auction government’s expectation was that they
can collect almost 2.42 billion EUR through this auction procedure. But after the auction they
have realized that they have earned 3.715 billion EUR, this amount is more than their
expectation. As I said earlier that revenue earning is one of the main objectives of auction;
after earning this big amount of 3.715 EUR we can say that regarding revenue government
has achieved their goal.

7.2 License Allocation:

According to the aims of the auction, government should not only focus on the revenue
maximizing. They should also focus on the market efficiency. Because if allocation of
licenses is not efficient then monopoly can be created in the market and obviously market
will be economically inefficient.

Now if I analyze the outcomes regarding the allocation of licenses then we can see that these
allocations are efficient. Because total 390.4MHz bandwidths were for auction. Among those
bandwidths Turkcell won the license of 110MHz and 35.2 MHz. Vodafone won the license of
70MHz and 79.6MHz . Avea won the license of 50MHz and New entrant won the license of
45.6. Government thinks that these outcomes will create competition in the Turkish
telecommunication market.

7.3 Budget Utilization:

Now if we focus on the utilization of total budget of four players then we can see that all
companies tried to utilize their budget.

Firstly, the total budget of Turkcell was 1.4 billion EUR. They tried to keep their position in
Turkish telecommunication market as incumbent. For this reason their target was to win two
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licenses. To achieve this they spent 1.27 billion EUR. It means they spent almost 91% of
their total budget. From the company’s point of view they utilized the maximum level of
budget.
Secondly, the total budget of Vodafone was 1.2 billion EUR. Their target was to win two
licenses for different frequency. And for this reason they spent their entire budget. It means
they were too aggressive to win those licenses.

Thirdly, Avea spent 675 million EUR. Whereas, their total budget was 900 million EUR.
They spent properly for winning one license.

Finally, New entrant was very much eager to enter into the Turkish market. For this reason
they tried to win one license and by spending 95% of their total budget they got the one
license for entering into the Turkish telecommunication market.

8. Comparison with Benchmark:

In this section I will compare my outcomes with the benchmark. I have already shown that by
Sealed-bid first price auction government can maximize revenue. But the benchmark
indicates that English auction is the most profitable auction than Sealed-bid first price
auction.

In terms of transparency, English, Anglo-Dutch and Ausubel auction are transparent. Because
actions of players can be observed by others. Whereas, Sealed-bid first price auction is not
transparent.

English auction can be the most profitable than Sealed-bid first price auction, but social effect
of Sealed-bid first price auction is positive and for English auction it is negative. Because
social effect is determined by the fair allocation of spectrum. We have already seen that the
outcomes regarding allocation are fair.

Benchmark shows that Sealed-bid first price auction attracts new entrants. That is already
proved in my simulation. Because Sealed-bid first price auction encourages the new player
for entering into new market.

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Benchmark reflects that regarding simplicity English auction is the best. But I do not agree
with this statement. Because according to my simulation it will not be fair to say that the
design of Sealed-bid first price auction is not clear to the players.
Finally my simulation was consisted of one type. But the benchmark of the perfect auction
should be based on mixed auction type. That is according to the benchmark it should be the
combination of Sealed-bid first price and English auction. In my experiment I didn’t use any
activity rule. But benchmark is to use the activity rule.

9. Comparison with German LTE Auction:

Now I will compare my outcomes with the outcomes of German LTE spectrum Auction,
2015. German authority expected that they can increase their revenue from 4 billion to 5
billion EUR. But the real outcome was slightly higher, that was 5.1 billion EUR
(Bundesnetzagentur)

In my simulation I have showed that the expectation of Turkish authority to increase revenue
from 2.30 billion to 2.43 billion EUR. But the real outcome is 3.71 billion EUR.

10. Conclusion:

Auction is mainly organized for maximizing revenue. According to this principle of auction
my simulation was successful to maximize revenue. Regarding efficient allocation my
simulation also worked properly. For this reason in real world if Turkish authority follows
this simulation then they can achieve their goals. But to be more precise and more realistic
there is always opportunity to extend this topic in future, for this reason I have to focus more
on the companies’ budget settings for further analysis.

Bidhan Krishna Das, 18106

06/07/2015, Kleve

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11. References:

1. AYŞEGÜL KARS, 2009: Telecommunications Reform in Turkey: Competition in

Voice Telephony and its Social Consequences, (City University, London, August-
2009).
2. Avea Senior Management:
http://www.ttinvestorrelations.com/corporategovernance/senior-management.aspx
3. BTK: http://www.tk.gov.tr/
4. Bundesnetzagentur:
http://www.bundesnetzagentur.de/cln_1431/EN/Home/home_node.html;jsessionid=5
8BA15549D8337A426E04FA458E3D77B
5. Philippe Jehiel and Benny Moldovanu, 2002: An Economic Perspective on Auctions
(3rd June, 2002).
6. Paul Klemperer, 2001: How (Not) to Run Auctions: the European 3G Telecom
Auctions; Nuffield College, Oxford University, August, 2001.
7. Thomas W. Hazlett, Roberto E. Muñoz, Diego B. Avanzini, 2011: What Really
Matters in Spectrum Allocation Design, George Mason University Law and
Economics Research Paper Series, 11-48, October 27, 2011.
8. Turkcell Management Team: http://www.turkcell.com.tr/en/aboutus/company-
overview/management-team
9. Vodafone Investors:
http://www.vodafone.com/content/index/investors/about_us/governance/executive_co
mmittee/serpil_timuray.html
10. The World Bank: http://www.worldbank.org/en/country/turkey/overview

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