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



By increasing the volatility (VOL) up to 0.5, the optimal policy associated with sunset
clause or permanent regulation increases the expected investment postponement to more
than two years, while in the other two scenarios it does not change. Conversely, by setting
the VOL equal to 0.4 the optimal policy suggests not to invest in the permanent regulation
scenario, while it dictates an immediate investment commitment under all other scenarios.

Table 4 - Established telecommunication operator outcomes data

Volatility

0.401

0.450

0.500

Up-front

cost

Payout
rate

NPV

1291

1388

1485

1291

1388

1485

1291

1388

1485

378

0.025

1.93

1.84

1.69

3.06

2.58

1.96

3.36

3.29

2.98

''^0λ)40 ^^'

0.00

^ ^0.O0^ ^

0.00 ^^

'^'T.37^'^

^ 0Й00 ^

^ Ô.00 ^

^^2.07^ ^'

.. -ɪ---ɪ-

0.00

0.055 '

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

440

0.025

3.18

2.96

1.93

3.39

3.26

3.16

3.93

3.48

3.41

0.040 '

1.78

0.00

0.00

2.04

^^L95 ^^

1.38

2.78 '

2.15 ’

2.07

0.055 '

0.00

0.00

0.00

0.00

0.00

0.00

2.08 '

0.00

0.00

502

0.025

3.90

3.29

3.16

4.09

3.87

3.39

4.31

4.19

3.93

0.040 '

2.01

1.94

1.64

3.17

2.10

2.04

3.48 '

3.25 ’

2.17

-^^0705^5 ^"

0.00

0.00

0.00

^^ 2^08~^~

^T77 ^^

0.00

^^2.25^ ^'

’ ^2.T8^"

2.08

As general result we note that, as expected, a sunset clause approach always induces a
longer expected investment postponement than that induced by a regulatory holiday. This is
equivalent to say that, all other conditions being equal, in terms of investments incentive,
the regulatory holiday scenario performs always better than sunset clause scenario.

Duopoly. In this scenario we relax the assumption that it is only the incumbent operator
which invests in NGNs. We assume that a second, smaller, operator exists in the market
and that it too intends to invest in next generation networks. For the sake of simplicity we
assume that the alternative operator aims at a market share in NGN access and services of
35%, which corresponds roughly to the average market share in the broadband market of

37



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