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Real options and cost-based access pricing: Model and methodology

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  • Franklin, Sergio Luis
  • Diallo, Madiagne

Abstract

This paper proposes a model and methodology for valuing the option to delay network investment decisions and calculating cost-based access prices. It argues that an option value multiple must be applied to the investment cost component of each network element in order to account for the value of the delay option that is extinguished at the time of investment. Option value multiples are calculated for the investment decision in three main network elements, each representing a different part of the Brazilian fixed telecommunications network, subject to different technological and demand uncertainties. After applying the markup factors, network costs must be assigned to network services on the basis of how much each service uses each network element.

Suggested Citation

  • Franklin, Sergio Luis & Diallo, Madiagne, 2013. "Real options and cost-based access pricing: Model and methodology," Telecommunications Policy, Elsevier, vol. 37(4), pages 321-333.
  • Handle: RePEc:eee:telpol:v:37:y:2013:i:4:p:321-333
    DOI: 10.1016/j.telpol.2012.11.005
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    References listed on IDEAS

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    1. Harmantzis, Fotios C. & Tanguturi, Venkata Praveen, 2007. "Investment decisions in the wireless industry applying real options," Telecommunications Policy, Elsevier, vol. 31(2), pages 107-123, March.
    2. Pindyck Robert S., 2007. "Mandatory Unbundling and Irreversible Investment in Telecom Networks," Review of Network Economics, De Gruyter, vol. 6(3), pages 1-25, September.
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    5. 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.
    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    7. Keiichi Hori & Keizo Mizuno, 2004. "Network Investment and Competition with Access-to-Bypass," Econometric Society 2004 Australasian Meetings 138, Econometric Society.
    8. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, April.
    9. Elizabeth Olmstead Teisberg, 1993. "Capital Investment Strategies under Uncertain Regulation," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 591-604, Winter.
    10. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Tselekounis, Markos & Varoutas, Dimitris & Martakos, Drakoulis, 2014. "A CDS approach to induce facilities-based competition over NGA networks," Telecommunications Policy, Elsevier, vol. 38(3), pages 311-331.
    2. Tang, Bao-Jun & Zhou, Hui-Ling & Chen, Hao & Wang, Kai & Cao, Hong, 2017. "Investment opportunity in China's overseas oil project: An empirical analysis based on real option approach," Energy Policy, Elsevier, vol. 105(C), pages 17-26.

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