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Mandatory Unbundling and Irreversible Investment in Telecom Networks

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Author Info
Robert S. Pindyck () (Sloan School of Management, Massachusetts Institute of Technology)

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Abstract

This paper addresses the investment impact of network sharing mandated by the 1996 Telecommunications Act. Such investments involve sunk costs and so are irreversible. Regulators allow entrants to utilize such facilities at prices reflecting the cost of building a new, efficient, large-scale network. Such sharing opportunities are extensive, covering virtually all network services, and extremely flexible, as entrants can rent facilities in small increments for short duration. Because entrants do not bear the sunk costs, there is an asymmetric allocation of risk and return not properly accounted for in the pricing of network services. This creates a significant investment disincentive.

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Publisher Info
Article provided by Concept Economics in its journal Review of Network Economics.

Volume (Year): 6 (2007)
Issue (Month): 3 (September)
Pages: 274-298
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Handle: RePEc:rne:rneart:v:6:y:2007:i:3:p:274-298

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Related research
Keywords: Telecommunications; Irreversible Investment; Sunk Cost; Risk;

Other versions of this item:

Find related papers by JEL classification:
L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Nicholas Economides, 1999. "Real Options and the Costs of the Local Telecommunications Network," Working Papers 99-11, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michele Moretto & Paolo M. Panteghini & Carlo Scarpa, 2007. "Profit Sharing and Investment by Regulated Utilities: a Welfare Analysis," "Marco Fanno" Working Papers 0059, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
    Other versions:
  2. Paolo Panteghini & Carlo Scarpa, 2008. "Political pressures and the credibility of regulation: can profit sharing mitigate regulatory risk?," International Review of Economics, Springer, vol. 55(3), pages 253-274, September. [Downloadable!] (restricted)
  3. Michele Moretto & Paola Valbonesi, 2007. "Firm Regulation and Profit Sharing: A Real Option Approach," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 7(1), pages 1714-1714. [Downloadable!] (restricted)
    Other versions:
  4. Bauer, Johannes, 2005. "Unbundling Policy in the United States Players, Outcomes and Effects," MPRA Paper 2455, University Library of Munich, Germany. [Downloadable!]
  5. Robert S. Pindyck, 2005. "Sunk Costs and Real Options in Antitrust," NBER Working Papers 11430, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Pio Baake & Ulrich Kamecke, 2006. "New Networks, Competition and Regulation," Discussion Papers of DIW Berlin 568, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  7. Dogan, Pinar & Bourreau, Marc, 2005. ""Build or Buy" Strategies in the Local Loop," Working Paper Series rwp05-060, Harvard University, John F. Kennedy School of Government. [Downloadable!]
    Other versions:
  8. Fernando Camacho & Flavio Menezes, 2009. "Access pricing and investment: a real options approach," Journal of Regulatory Economics, Springer, vol. 36(2), pages 107-126, October. [Downloadable!] (restricted)
  9. Fernando T. Camacho & Flavio M. Menezes, 2008. "Price Regulation and Investment: A Real Options Approach," Discussion Papers Series 373, School of Economics, University of Queensland, Australia. [Downloadable!]
  10. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Andrea Gavosto & Guido Ponte & Carla Scaglioni, 2007. "Investment in Next Generation Networks and the Role of Regulation: A Real Option Approach," Working Papers 2007/31, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
  12. Fernando T. Camacho & Flavio Menezes, 2008. "Regulation and the Option to Delay," Discussion Papers Series 356, School of Economics, University of Queensland, Australia. [Downloadable!]
  13. Paolo Panteghini, 2004. "Wide vs. Narrow Tax Bases under Optimal Investment Timing," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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