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Pricing Capital Under Mandatory Unbundling and Facilities Sharing

  • Robert S. Pindyck

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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File URL: http://www.nber.org/papers/w11225.pdf
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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
Note: AP IO
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  1. 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.
  2. Nicholas Economides & V. Brian Viard & Katja Seim, 2007. "Quantifying the Benefits of Entry into Local Phone Service," Working Papers 07-48, NET Institute, revised Dec 2007.
  3. 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.
  4. 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.
  5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, April.
  6. 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, May.
  7. 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 Micr), pages 1-54.
  8. Crandall Robert W. & Ingraham Allan T & Singer Hal J, 2004. "Do Unbundling Policies Discourage CLEC Facilities-Based Investment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-25, June.
  9. M. Bourreau & P. Dogan, . "Unbundling the Local Loop," Working Paper 33648, Harvard University OpenScholar.
  10. 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.
  11. 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.
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