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Real options applications for telecommunications deregulation

  • Greg Hallman
  • Chris McClain
Part of the Topics in Regulatory Economics and Policy book series (TREP, volume 34)

Abstract

Competition in local phone markets has not developed as envisioned in the Telecommunications Act of 1996. One reason for the lack of competition is that the prices for unbundled network elements (UNEs) are likely set too low. A major reason for UNE underpricing is that the FCC’s TELRIC-based pricing methodology ignores the option component of the CLEC’s decision to purchase UNEs from ILECs. A real options framework for pricing UNEs is illustrated that demonstrates how TELRIC-based prices result in underpricing. Additionally, the real options framework suggests policy changes that could mitigate this underpricing problem and enhance local market competition.

Keywords

Local Market Real Option Call Option Exercise Price Access Charge 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.
    FCC, “Responses to the First Common Carrier Bureau Survey on the State of Local Competition,” March 27, 1998. See http://www.fcc.gov/ccb/local_competition/survey/responses/.
  2. 2.
    Hume, Barbara. 1988. Local Loop Competition. Masters thesis, University of Colorado.Google Scholar
  3. 3.
    The FCC estimates that AT&T’s share of long distance minutes has dropped from 85% in 1984 to about 55% today. See Zolnierek, James and Katie Rangos. January 1998. Long Distance Market Shares — Third Quarter 1997, FCC, p. 29.Google Scholar
  4. 5.
    Telecommunications Report, Nov. 2, 1998.Google Scholar
  5. 6.
    Dixit, Avinash K. and Robert S. Pindyck. 1994. Investment Under Uncertainty. Princeton, NJ: Princeton University Press.Google Scholar
  6. 7.
    Telecommunications Reports, Nov. 9, 1998.Google Scholar
  7. 8.
    See Alleman, James, “The Application of Real Options to Cost Models,” this volume. This list is largely based upon Alleman’s presentation at CITI’s October 2, 1998 real options conference.Google Scholar
  8. 9.
    For a good example of this, see Ross, S. Autumn 1995. “Uses, Abuses, and Alternatives to the Net-Present-Value Rule.” Financial Management, Vol. 24,No. 3, pp. 96–102.CrossRefGoogle Scholar
  9. 10.
    Dixit and Pindyck, op. cit., pp. 26–29.Google Scholar
  10. 11.
    The seminal work in this area is: Black, F. and M. Scholes. May–June 1983. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, and Merton, R. Spring 1973. “Theory of Rational Option Pricing,” The Bell Journal of Economics and Management Science, Vol. 4, No. 1.Google Scholar
  11. 12.
    TR DAILY, Nov. 20, 1998.Google Scholar
  12. 13.
    Madden, Andrew P. October 1998. “What Happened to the Telecom Act?” The Red Herring. See http://www.redherring.com/mag/issue59/telecom.html.

Copyright information

© Kluwer Academic Publishers 1999

Authors and Affiliations

  • Greg Hallman
    • 1
  • Chris McClain
    • 1
  1. 1.PHB Hagler Bailly, Inc. and Vouchsafe, Inc.USA

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