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Post by Sapphire Capital on Jul 11, 2008 7:06:38 GMT 4
Business Value and Risk in the Presence of Price Controls: An Option-Based Analysis of Margin Squeeze Rules in the Telecommunications Industry PHILIPP N. BAECKER European Business School GUNNAR GRASS European Business School, Germany ULRICH HOMMEL European Business School, Germany -------------------------------------------------------------------------------- January 1, 2008 Abstract: Recent studies have emphasized the role of irreversibility, flexibility, and uncertainty in assessing the financial implications of regulated access pricing in the telecommunications market (Pindyck, 2004, 2005a). In particular it has been argued that mandatory unbundling of the local loop creates optionality (real options), leading to a transfer of wealth from incumbents to entrants unaccounted for by a static investment perspective. We extend this line of research by explicitly considering the significance of margin squeezes and related pricing rules in a duopoly model tailored to a German context. Analytical and numerical methods are employed to characterize pricing behavior and market dynamics under demand uncertainty. We draw conclusions with respect to the incumbent's cost of capital under regulatory intervention. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1123746_code354508.pdf?abstractid=1117084&mirid=2
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