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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.

Suggested Citation

  • Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11225
    Note: AP IO

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    References listed on IDEAS

    1. Nicholas Economides & Katja Seim & V. Brian Viard, 2008. "Quantifying the benefits of entry into local phone service," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 699-730.
    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.
    3. 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.
    4. 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.
    5. 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.
    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 Micr), pages 1-54.
    7. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    8. Bourreau, Marc & Dogan, Pinar, 2005. "Unbundling the local loop," European Economic Review, Elsevier, vol. 49(1), pages 173-199, January.
    9. 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.
    10. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    11. repec:oup:jcomle:v:1:y:2005:i:1:p:173-245. is not listed on IDEAS
    12. Kaisa Kotakorpi, 2004. "Access Price Regulation, Investment and Entry in Telecommunications," Working Papers 0435, University of Tampere, School of Management, Economics.
    13. 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 149-163, September.
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    Cited by:

    1. Marc Bourreau & Pinar Dogan, 2006. ""Build-or-Buy" Strategies in the Local Loop," American Economic Review, American Economic Association, vol. 96(2), pages 72-76, May.
    2. de Braganca, Gabriel Fiuza & Rocha, Katia & Moreira, Rafael Henrique Rodrigues, 2008. "Real Options and the Regulation of Brazilian Fixed-Line Telephone Operators: The Mark-up on the Cost of Capital," Working Paper Series 3997, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. 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.
    4. Elizabeth Baldwin & Yongyang Cai & Karlygash Kuralbayeva, 2018. "To Build or Not to Build? Capital Stocks and Climate Policy," CESifo Working Paper Series 6884, CESifo Group Munich.
    5. Pindyck, Robert S., 2005. "Sunk Costs and Real Options in Antitrust," Working papers 18233, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Amitay Alter, 2006. "The Effect of Access Regulation on Broadbnd Deployment," Discussion Papers 06-017, Stanford Institute for Economic Policy Research.
    7. James ALLEMAN & Gary MADDEN & Hak KIM, 2008. "Real Options Methodology Applied to the ICT Sector: A Survey," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(70), pages 27-44, 2nd quart.
    8. Henning Never, 2010. "Risk Sharing for Next Generation Access Networks – Necessary Adjustments of the Present European Regulatory Framework for Electronic Communication Networks and Services," Chapters,in: Promoting New Telecom Infrastructures, chapter 9 Edward Elgar Publishing.
    9. Pio Baake & Brigitte Preißl (Eds.). Johannes M. Bauer & Per Björstedt & Elena Gallo & Anders Henten & Sven Lindmark & Martijn Poel & Enzo Pontarollo & Knud Erik Skouby & Jason Whalley, 2006. "Local Loop Unbundling and Bitstream Access: Regulatory Practice in Europe and the U.S," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 20, number pbk20.
    10. 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.
    11. 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.
    12. Fernando T. Camacho & Flavio Menezes, 2008. "Regulation and the Option to Delay," Discussion Papers Series 356, School of Economics, University of Queensland, Australia.

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    JEL classification:

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

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