Real options applications for telecommunications deregulation
Competition in local phone markets has not developed as envisioned in the Telecommunications Act of 1996. One reason for the lack of competition is that the prices for unbundled network elements (UNEs) are likely set too low. A major reason for UNE underpricing is that the FCC’s TELRIC-based pricing methodology ignores the option component of the CLEC’s decision to purchase UNEs from ILECs. A real options framework for pricing UNEs is illustrated that demonstrates how TELRIC-based prices result in underpricing. Additionally, the real options framework suggests policy changes that could mitigate this underpricing problem and enhance local market competition.
KeywordsLocal Market Real Option Call Option Exercise Price Access Charge
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