At present, no existing market mechanism allows for the trading of radio spectrum between licensed and unlicensed uses. Whenever spectrum is made available for reallocation, the Federal Communications Commission faces a dilemma in determining which access regime to use. Since both licensed and unlicensed allocations are valuable, allocation decisions must be based on a clear understanding of the trade-offs between the two choices. This paper defines economic criteria that can be used in making these important decisions. Economic criteria can go beyond the simple measures of profit and consumer surplus from market transactions. Although some measures of benefit, such as the value of innovation, may be difficult to quantify, the analytic economic framework presented here can easily incorporate them. This analysis does not address any non-economic considerations in choosing between licensed and unlicensed uses. As one example, the issue of potential societal benefits from promoting minority ownership of spectrum through restricted licenses - something only possible in a licensed regime - is not addressed in this economic analysis. The analysis herein provides the economic information needed for policy analysis - it need not be the sum total of that policy analysis. Standard economic theory tells us that the value of an additional unit of spectrum is equal to the increase in socially beneficial services it produces. For licensed spectrum allowed to trade in markets, this value is relatively easy to calculate: It is the price. The equation is much more complex, however, when unlicensed spectrum is involved. The current value of unlicensed spectrum bands is equal to the sum of the value of the spectrum in all uses in those bands. The incremental value of additional spectrum allocated to unlicensed uses, however, is based on the relief to congestion that the additional spectrum will provide. Unlicensed spectrum also has an option value from future innovations associated with lower transaction costs. This option value increases with additional allocations of unlicensed spectrum, leading to the benefit of incremental option value from additional unlicensed spectrum. The formula can be summarized as "congestion alleviation plus incremental option value." I apply the analysis developed for TV white spaces. I use a detailed Economic Area estimate of white spaces and apply Lower 700MHz Band E Block prices (adjusted downward for the increased supply of licensed spectrum from the white spaces) to calculate the value of licensing the white spaces. I also calibrate an estimate of value of unlicensed white spaces. Initial calibration of the economic criteria that determine the trade-off between incremental licensed and unlicensed spectrum allocations indicates that broadly defined economic criteria strongly favor licensing incremental allocations. If policy makers choose to allocate incremental spectrum as unlicensed, they should understand the economic costs of that choice.
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