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FCC’s 1-800-AUCTION Makes Economic Sense

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FCC’s 1-800-AUCTION Makes Economic Sense

October 1, 2017

The Federal Communications Commission recently issued a Notice of Proposed Rulemaking seeking comments on a proposal to modernize the way toll-free numbers are distributed. Toll-free numbers have distinct three-digit codes that can be called from landlines at no cost to the caller. These numbers can be useful for businesses and customer service, but the way they are allocated is inefficient and outdated.

In the current framework, numbers are assigned on a first-come, first-served basis by entities called “Responsible Organizations,” often called “RespOrgs,” that had access to a database with the current status of toll-free numbers. This system does not acknowledge that not all toll-free numbers are created equal, and certain numbers might be substantially more valuable to potential organizations. Companies may be willing to pay more for numbers that spell out memorable words, or are related to what the company does, such as 1-800-PETMEDS. Companies that may be willing to pay more or value the numbers more highly have no recourse to obtain it.

The new system would use a competitive auction for about 17,000 such numbers in the new 833 code. Under the auction system numbers would go to the RespOrgs that value them the most highly, and the Commission would allow prices to determine the allocation.  The structure of the auction would deter gamesmanship or strategic bidding by interested parties. The auctions would be a single-round, with sealed bids, and the winner paying the second-highest bid. This format would lead to interested parties submitting bids in line with their actual valuation, instead of trying to outmaneuver rivals.

By introducing prices into the allocation of limited, desirable resources, the FCC could increase the efficiency with which the numbers are distributed. Auctions would also deter RespOrgs from hoarding numbers that then sit unused, because they would have to bid on any competitive numbers.

The improvement in efficiency would be the main contribution, but auction revenues could also be used to help pay for the administration of toll-free numbers. When Australia auctioned off some unreleased toll-free numbers, the highest bid of over $1 million was for the number spelling out “13 TAXI.” In the first-come, first-serve framework, the allocation ignores the revenue potential of some numbers. Auction revenues will not be large enough to put a dent in the federal government’s overall budget deficit, but they could help pay for the associated costs.

One of the other major functions for toll-free numbers is a resource for health and safety information from government agencies or non-profit organizations. In recognition of this other component, the Notice would set aside the toll free numbers necessary for these functions so they are not affected or disrupted by the introduction of auctions for the competitive numbers.

The new framework would also lift the prohibition on re-selling toll-free numbers in the secondary market. This would be a marked improvement over the current system, in which subscribers who no longer want their toll-free number have to give it back to the database, where it is  then reassigned. Instead, subscribers would be allowed to reassign the toll-free numbers to other subscribers for some compensation that they negotiate on their own, without additional role for the government. 

Number assignments could more easily flow to new businesses or organizations that may value them more highly. If, for example, a small flower shop owned the toll-free number that spelled out NETFLIX, it would be simpler to sell the rights to that number to the company that values it more highly. Allowing the secondary market to develop more fully would further improve the efficiency of toll-free number distribution. 

In his statement, FCC Commissioner Ajit Pai referenced Nobel laureate Ronald Coase, who initially proposed that the FCC use auctions for spectrum licenses in 1959. Although Coase’s idea was initially met with skepticism, the FCC finally held its first spectrum auction in 1994. Toll-free numbers are smaller in scale, but Chairman Pai’s action is a welcome sign that the FCC is moving away from the bureaucratic way it has been distributing numbers—and perhaps carving out space for prices and economic incentives in other areas in the months ahead.  

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes

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