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http://hdl.handle.net/2451/26239
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| Title: | Real Options and the Costs of the Local Telecommunications Network |
| Authors: | Economides, Nicholas |
| Keywords: | telecommunications
regulation
cost
real options |
| Issue Date: | Jun-1999 |
| Series/Report no.: | EC-99-11 |
| Abstract: | The Telecommunications Act of 1996 invites entry in the local
telecommunications networks whereby entrants will lease parts of the
network (“unbundled network elements”) from incumbents
“at cost plus reasonable profit.” A crucial question in the
implementation of the Act is the appropriate measure of cost. This paper
examines the economic principles on which the cost calculation should be
based. I conclude that the appropriate measure of cost (maximizing
allocative, productive, and dynamic efficiency) is forward-looking
economic cost and not the historical, accounting, or embedded cost of
the incumbent’s network. In calculating costs, demand and supply
uncertainty, as well as the asymmetric position of incumbents and
entrants should be taken into account. Close examination of the issue of
uncertainty in the local telecommunications network reveals that (i) for
most unbundled network elements, there is little demand uncertainty; and
(ii) that those elements that face significant uncertainty, do not have
sunk value. Thus, the incumbent does not face higher expected cost by
investing. Moreover, the rewards of the incumbent can be higher because
buyers prefer to buy services from the owner of the network. Finally,
strategic considerations in oligopolistic interaction are likely to
dominate any uncertainty considerations and will increase the incentive
of incumbents to invest. |
| URI: | http://hdl.handle.net/2451/26239 |
| Appears in Collections: | Economics Working Papers
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