IDEAS home Printed from
   My bibliography  Save this paper

Regulation and the Option to Delay



This paper examines a simple two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the minimum price that an unregulated monopolist demands to bear the demand uncertainty and invest early, that is, the price that incorporates the value of the option to delay. In a regulated environment, we show that in the absence of downstream competition and when the regulator cannot commit to ex-post demand contingent prices, a regulated price that incorporates the option to delay is the minimum price that ensures early investment. Furthermore, when the regulator has a preference for early investment, the option to delay price generates higher welfare than other forms of price regulation. We also show that when the vertically integrated network provider is required to provide access to downstream competitors, and the potential entrant is less efficient than the incumbent, an access price that incorporates the option to delay generates the same investment level output as and higher overall welfare than an unregulated industry that is not required to provide access. By contrast, under the same market conditions an ECPR-based access price generates the same overall welfare than an unregulated industry. Moreover, when the potential entrant is more efficient than the incumbent, an Option to Delay Pricing Rule generates the same investment level output as and (weakly) higher overall welfare than the Efficient Component Pricing Rule (ECPR). In addition, the option-to-delay-based access price is (weakly) lower than the ECPR-based access price.

Suggested Citation

  • Fernando T. Camacho & Flavio Menezes, 2008. "Regulation and the Option to Delay," Discussion Papers Series 356, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:356

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. repec:reg:rpubli:337 is not listed on IDEAS
    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. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qld:uq2004:356. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (SOE IT). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.