The New Investment Theory of Real Options and Its Implication for Telecommunications Economics

by Alleman, James H.; Noam, Eli M.

• ISBN13: 9780792377344
• ISBN10: 0792377346
• Format: Hardcover
• Copyright: 2000-01-01
• Publisher: Kluwer Academic Pub

Summary

The issue of costing and pricing in the telecommunications industry has been hotly debated for the last twenty years and we are still wrestling over the cost of the local exchange for access by interexchange and competitive local exchange carriers, as well as for universal service funding. With the advent of competition, the historical costing schemes had to change. Federal regulators wanted to ensure that monopoly rates did not subsidize competitive offerings. As a result, various costing methodologies were devised to allocate costs among the dominant carriers' services. The issue of costs can be summarized as two-fold: the quantitative determination of the level of costs and the proper attribution of those costs. Both are fraught with questions. The amount of costs, for instance, can vary from book costs to marginal costs. The attribution of costs can vary from those that are directly attributable to those that are joint and common. Hence, the need for costing theories and models. The industry is constantly in search of theories and models that more accurately reflect the underlying costs of service. It is in this light that the papers have been compiled for The New Investment Theory of Real Options in Telecommunications . Real options theory attempts to consider management's flexibility in valuation analysis and corrects the deficiencies of the traditional discounted present-value and decision tree analyses. This book sets forth an introduction and overview of the subject, and then provides the reader with a primer on real options. The volume highlights the controversies that surround the application of real options in the telecommunications industry; however, the editors have effectively separated the issues of application from those of interpretation.

Table of Contents

Preface

Acknowledgements

Introduction and Overview

Real Options: An Overview

Real Options: A Primer

Real Options Applications in the Telecommunications Industry

Does Practice Follow Principle? Applying Real Options Principles to Proxy Costs in U.S. Telecommunications

Real Options: What Telecommunications Can Learn from Electric Power

Cost Models: Comporting with Principles

The Design of Forward Looking Cost Models for Exchange Telecommunications Networks

Forward Looking Telecommunications Cost Models

Implications of Neglecting Real Options

An Institutional Perspective on Assessing Real Options Values in Telecommunications Cost Models

Real Options Applications for Telecommunications Deregulation

The Poverty of Cost Models, the Wealth of Real Options

The Forecasting Implications of Telecommunications Cost Models

The Effect of Sunk Costs in Telecommunications Regulations

Real Options: Evaluations

Real Options and the Costs of the Local Telecommunications Network

Option Value Analysis and Telephone Access Charges

Rethinking the Implications of `Real Options' Theory for the U.S. Local Telephone Industry

Application of Real Options Theory to TELRIC Models: Real Trouble or Red Herring

Discussion: A View from Outside the Industry

Rejoinder

Summary/Conclusions

Real Options, False Choices: A Final Word

Biographies

Index

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