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Pricing Capital Under Mandatory Unbundling and Facilities Sharing

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Author Info
Robert S. Pindyck

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Abstract

The regulation of telecommunications, railroads, and other network industries has been based on mandatory unbundling and facilities sharing - entrants have the option to lease part or all of incumbents' facilities if and when they desire, at rates determined by regulators. This flexibility is of great value to entrants, but because investments are largely irreversible, it is costly to supply by incumbents. However, pricing formulas used by regulators to set lease rates for capital do not compensate incumbents for this flexibility, so that incumbents are effectively forced to subsidized entrants, discouraging further investments. This paper shows how pricing formulas used to set lease rates can be adjusted to account for the transfer of option value from incumbents to entrants, and estimates the average size of the adjustment for land-based local voice telecommunications in the U.S.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11225.

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Date of creation: Mar 2005
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Handle: RePEc:nbr:nberwo:11225

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L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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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. Bourreau, Marc & Dogan, Pinar, 2005. "Unbundling the local loop," European Economic Review, Elsevier, vol. 49(1), pages 173-199, January. [Downloadable!] (restricted)
  2. Nicholas Economides & V. Brian Viard & Katja Seim, 2005. "Quantifying the Benefits of Entry into Local Phone Service," Working Papers 05-08, NET Institute, revised Nov 2005. [Downloadable!]
    Other versions:
  3. Robert S. Pindyck, 2004. "Mandatory Unbundling and Irreversible Investment in Telecom Networks," NBER Working Papers 10287, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Christopher R. Knittel, 2004. "Regulatory Restructuring and Incumbent Price Dynamics: The Case of U.S. Local Telephone Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 614-625, 04. [Downloadable!] (restricted)
  5. Robert W. Crandall & Allan T. Ingraham & Hal J. Singer, 2004. "Do Unbundling Policies Discourage CLEC Facilities-Based Investment," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  6. Jerry A. Hausman, 1997. "Valuing the Effect of Regulation on New Services in Telecommunications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997-1), pages 1-54. [Downloadable!]
  7. Hausman, Jerry & Myers, Stewart, 2002. "Regulating the United States Railroads: The Effects of Sunk Costs and Asymmetric Risk," Journal of Regulatory Economics, Springer, vol. 22(3), pages 287-310, November. [Downloadable!] (restricted)
  8. Richard N. Clarke & Kevin A. Hassett & Zoya Ivanova & Laurence J. Kotlikoff, 2004. "Assessing the Economic Gains from Telecom Competition," NBER Working Papers 10482, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Salinger, Michael A, 1998. "Regulating Prices to Equal Forward-Looking Costs: Cost-Based Prices or Price-Based Costs?," Journal of Regulatory Economics, Springer, vol. 14(2), pages 149-63, September. [Downloadable!] (restricted)
  10. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December. [Downloadable!] (restricted)
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(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. 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:
  2. Keiichi Hori & Keizo Mizuno, 2009. "Competition schemes and investment in network infrastructure under uncertainty," Journal of Regulatory Economics, Springer, vol. 35(2), pages 179-200, April. [Downloadable!] (restricted)
  3. 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:
  4. 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)
  5. Jeffrey I. Bernstein & Theofanis P. Mamuneas, 2007. "Irreversible Investment, Capital Costs and Productivity Growth: Implications for Telecommunications," Review of Network Economics, Concept Economics, vol. 6(3), pages 299-320, September. [Downloadable!]
    Other versions:
  6. Fernando T. Camacho & Flavio Menezes, 2008. "Regulation and the Option to Delay," Discussion Papers Series 356, School of Economics, University of Queensland, Australia. [Downloadable!]
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