Option Value Analysis and Telephone Access Charges

Abstract

This paper explores the policy implications of the recent options value analysis for telecommunications. It shows that application requires very great care because otherwise, the actions taken, while they appear to follow the analysis, can actually go in the opposite direction. This is demonstrated by access fees for interexchange carriers’ use of the local loop. Because options analysis shows that the true cost of an investment, including future opportunity cost, is greater than it appears to be, the access charges should apparently be raised accordingly to discourage excessive investment in facilities. But here, raising access fees, rather than discouraging investment, is likely to increase it. Increasing the cost of entry through the use of currently extant facilities will lead to increased facilities-based entry. This will thereby exacerbate any excessive investment rather than reduce it.