Investment in Next Generation Networks and the Role of Regulation: A Real Option Approach

Investment in Next Generation Networks and the Role

#

of Regulation: A Real Options Approach ^#

Andrea Gavosto, Guido Ponte and Carla Scaglioni

*

Economic Research Division - Telecom Italia

Preliminary

This draft: 11 December 2007

Abstract

The current regulatory debate in the telecommunications industry in Europe and elsewhere
is dominated by the issue of if and how to regulate next generation networks (NGN) which
operators plan to roll out in the near future. The crucial issue is whether an extension of
current regulatory obligations onto future networks would hamper the investment by large
European operators. The paper applies a real option model to explain the investment
decision in next generation networks. One important result of the model is that regulation
affects the investment decision only in the initial period when uncertainty is still very high.
The real option model has been calibrated with parameters drawn from real data for a new
entrant and from educated estimates for an established operator. Four different regulatory
regimes and their impact on the timing of the investments have been simulated: a temporary
regulatory holiday is shown to be an effective regulatory tool in order to induce immediate
investments.

JEL Classification Numbers: L51, D81, G11, G35

Keywords: real options, telecommunication, regulated industries, Next Generation Networks.

^# The opinions expressed herein are those of the authors and do not necessarily reflect those of Telecom
Italia. We thank ffiigo Herguera and the partecipants to the IDEI/Bruegel Conference, 25-26 October 2007-
Brussels, on Regulation, Competition and Investment in Network Industries for useful comments
"Strategv-Studi Economici. Corso d'Italia 41,    00198 Rome. Corresponding author:

[email protected]

<<   1   2   3   4   5   >>

More intriguing information