Working Paper: NBER ID: w11225
Authors: Robert S. Pindyck
Abstract: 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.
Keywords: telecommunications; pricing; mandatory unbundling; facilities sharing; option value
JEL Codes: L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| failure of pricing formulas (L11) | undercompensation of incumbents (M52) |
| undercompensation of incumbents (M52) | discouragement of further investments (F21) |
| failure of pricing formulas (L11) | discouragement of further investments (F21) |
| adjustment of cost of capital (G31) | reflection of true economic value of capital investments (G31) |
| adjustment of cost of capital (G31) | potential annual increase in TELRIC-related revenue (L96) |