Pricing Capital Under Mandatory Unbundling and Facilities Sharing

Robert Pindyck

No 11225, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: L51 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-net
Note: AP IO
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Citations: View citations in EconPapers (30)

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