The New Investment Theory of Real Options and its Implication for Telecommunications Economics
Topics in Regulatory Economics and Policy Series Michael A. Crew, Editor Graduate School of Management, Rutgers University Newark, New Jersey, U.S.A.
Previously published books in the series: Gordon, R. L.: Kegulation and Economic Analysis: A Critique Over Two Centuries Blackmon, G.: Incentive Regulation and the Regulations of Incentives Crew, M.: Incentive Kegulation for Public Utilities Crew, M.: Commercialisation of Postal and Delivery Services Abbott, T. A.: Health Care Policy and Regulation Goff, B.: Regulation and Macroeconomic Performance Coate, M.B. and A.N. Kleit: The Economics of the Antitrust Process Franz, R. S.: X-Efftciency: Theory, Evidence and Applications (Second Edition) Crew, M.: Pricing and Regulatory Innovations Under Increasing Competition Crew, M., and P. Kleindorfer: Managing Change in the Postal Delivery Industries Awerbuch, S. and A. Preston: The Virtual Utility Gabel, D. and D. Weiman: Opening Networks to Competition: The Regulation and Pricing ofAccess Zaccour, G.: Deregulation of Electric Utilities Young, W.: Atomic Energy Costing Crew, M.: Regulation Under Increasing Competition Crew, M.A. and P.R. Kleindorfer: Emerging Competition in Postal and Delivery Services Cherry, B.A.: The Crisis in Telecommunications Carrier Uahility: Historical Regulatory Flaws and Recommended Reform Loomis, D.G. and L.D. Taylor The Future of the Telecommunications Industry: Forecasting and Demand Analysis
The New Investment Theory of Real Options and its Implication for Telecommunications Economics edited by James Alleman University of Colorado at Boulder and PHB Hagler Bailly Eli Noam Columbia University
Kluwer Academic Publishers Boston/Dordrecht/London
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Library of Congress Cataloging-in-Publication Data Real options in telecommunications : the new investment theory and its implications for telecommunications economics / edited by James Alleman, Eli Noam, p. cm. Includes bibliographical references and index. ISBN 0-7923-7734-6 (acid-free paper) 1. Telecommunication-Economic aspects. 2. Capital budget. 3. Options (Finance) I. Alleman, James H. II. Noam, Eli M. HE7631 .R43 1999 384'.041"dc21 99-052725 Copyright ® 1999 by Kluwer Academic Publishers. Second Printing 2002. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher, Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, Massachusetts 02061 Printed on acid-free paper. Printed in the United States of America This printing is a digital duplication of the original edition.
Contents Preface
vii
Randall B. Lowe, Piper & Marbury
Acknowledgements Introduction and Overview
xi xiii
James Alleman, University of Colorado and PHB Hagler Bailly
Real Options: An Overview 1. Real Options: A Primer
1 3
Lenos Trigeorgis, University of Cyprus
2.
Real Options Applications in ttie Telecommunications Industry
35
Sanjai Bhagat, University of Colorado
3.
Does Practice Follow Principle? Applying Real Options Principles to Proxy Costs in U.S. Telecommunications
49
Mark A. Jamison, University of Florida
4.
Real Options: Wtiat Telecommunications Can Learn from Electric Power
77
Todd Strauss, PHB Hagler Bailly
Principles 5. Cost Models: Comporting with Principles
85 87
Richard Emmerson, INDETEC International
6.
Ttie Design of Forward Lool
