Posted offers in exogenous networks: A theoretical application and experimental results

The Federal Communications Commission (FCC) allocates bands of radio frequency on the electromagnetic spectrum to agents called primary users (PUs), typically through standard auctions. We devise ways for unused channels to be sold in a secondary market to secondary users (SUs) who do not have licensing rights to access the spectrum. We propose a model in which PUs can set prices and offer unused channels to SUs, where trading takes place in small exogenous networks. Equilibrium prices depend on both the structure of the network and buyer valuation, and interestingly, “good” buyer location on the network is not always favorable. In equilibrium, buyers with many connections on the network can face high prices despite seller competition and can even face two prices in equilibrium. We test this model in an experiment, varying network structure and price possibilities across a total of four experimental sessions. Our results provide evidence that buyers in good locations often face high prices despite seller competition and that buyers in bad locations also face high prices but have the benefit of being served first in the market.