  In this paper, we study spectrum allocation mechanisms in hierarchical
multi-layer markets which are expected to proliferate in the near future based
on the current spectrum policy reform proposals. We consider a setting where a
state agency sells spectrum channels to Primary Operators (POs) who
subsequently resell them to Secondary Operators (SOs) through auctions. We show
that these hierarchical markets do not result in a socially efficient spectrum
allocation which is aimed by the agency, due to lack of coordination among the
entities in different layers and the inherently selfish revenue-maximizing
strategy of POs. In order to reconcile these opposing objectives, we propose an
incentive mechanism which aligns the strategy and the actions of the POs with
the objective of the agency, and thus leads to system performance improvement
in terms of social welfare. This pricing-based scheme constitutes a method for
hierarchical market regulation. A basic component of the proposed incentive
mechanism is a novel auction scheme which enables POs to allocate their
spectrum by balancing their derived revenue and the welfare of the SOs.
