Anticipatory Investment in Regulated Infrastructure: A Real Options Approach and Competitive Benchmark

Tian Zhao () and Tooraj Jamasb
Additional contact information
Tian Zhao: Department of Finance, College of Economics and Management, Hebei Agricultural University

No 5-2025, Working Papers from Copenhagen Business School, Department of Economics

Abstract: Timely investment in capacity and fair pricing are critical for the development of infrastructure sectors and regulation plays a central role in their investment decisions and consumer welfare. Considering the natural monopoly characteristics of many infrastructure sectors and uncertainty in demand for new capacity, this paper develops a real options model to determine the optimal timing and capacity for anticipatory investments in infrastructure. We design a novel ex-ante regulatory framework to explore how perfect competition can serve as benchmark for regulating anticipatory investment in infrastructure under uncertainty. We compare optimal timing and capacity for anticipatory investment in infrastructure between the realistic monopoly model and an ideal competitive model. We show that our proposed price-cap regulatory model based on competitive benchmark would not only ensure timely investment in infrastructure but also spurs consumer participation by offering fairer access pricing and more capacity provision. This paper can serve as a reference for anticipatory investment in infrastructure development.

Keywords: Investment decision-makings; Real options; Infrastructure; Market power; Perfect competition; Price-cap regulation (search for similar items in EconPapers)
JEL-codes: C60 D40 L10 L50 Q40 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2025-07-11
New Economics Papers: this item is included in nep-com and nep-reg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hdl.handle.net/10398/32de683a-73c6-4443-8d4d-681f3f0b9f5a Full text (application/pdf)
Full text not avaiable

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:cbsnow:2025_005

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Copenhagen Business School, Department of Economics Copenhagen Business School, Department of Economics, Porcelaenshaven 16 A. 1.floor, DK-2000 Frederiksberg, Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by CBS Library Research Registration Team ().