Abstract
Pricing rules specific to the German telecommunications market limit the incumbents flexibility, providing a competitive advantage to all other market participants. More specifically, the incumbent is required not to offer products to its end customers at prices below a predetermined level in order to prevent margin squeezes. In contrast, competitors can freely choose their pricing strategy. In this paper, we propose the imposition of equivalent price barriers on all market participants in order to avoid price margin squeezes and reduce regulatory discrimination at the same time. We tailor a duopoly model to the German context, integrating the regulation of access pricing and price margin squeezes. Under standard parameter assumptions, we demonstrate that no economically significant effects on the value of market participants are observed for the case of market wide price regulation. We conclude that adjusting the current regulatory framework can enhance competition and increase welfare.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Alleman, J. J. (2002). A new view of telecommunications economics. Telecommunications Policy, 26(1), 87–92.
Alleman, J. J., & Noam, E. M. (Eds.). (1999). Topics in regulatory economics and policy : Vol. 34. Real options in telecommunications: the new investment theory and its implications for telecommunications economics. Norwell: Kluwer Academic.
Alleman, J. J., & Rappoport, P. N. (2002). Modelling regulatory distortions with real options. Engineering Economist, 47(4), 389–416.
Alleman, J. J., & Rappoport, P. N. (2006). Modelling regulatory distortions with real options: an extension. In Governance of communication networks. Governance of communication networks (pp. 459–478). Heidelberg: Physica.
Becker, R. A., & Chakrabarti, S. K. (2005). Satisficing behavior, Brouwer’s fixed point theorem and Nash equilibrium. Economic Theory, 26(1), 63–83.
Cave, M., & Prosperetti, L. (2001). European telecommunications infrastructures. Oxford Review of Economic Policy, 17(3), 416–431.
Commission of the European Communities (1997). Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provision (ONP). OJ L199/32, 26.07.97.
Commission of the European Communities (1998). Recommendation 98/511/EC of 29 July 1998 on interconnection in a liberalised telecommunications market (part 1—interconnection pricing).
Courtadon, G. (1982). A more accurate finite difference approximation for the valuation of options. Journal of Financial and Quantitative Analysis, 17(5), 697–703.
Crandall, R. W., Ingraham, A. T., & Singer, H. J. (2004). Do unbundling policies discourage CLEC facilities based investment. The B.E. Journal in Economic Analysis and Policy, Manuscript 1136.
Dixit, A. K. (1991). Irreversible investment with price ceilings. Journal of Political Economy, 99(3), 541–557.
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton: Princeton University Press.
Evans, L. T., & Guthrie, G. A. (2003). Risk, price regulation, and irreversible investment (Mimeo). New Zealand Institute for the Study of Competition and Regulation, Wellington, New Zealand.
Forsyth, P. A., & Vetzal, K. R. 2004. Analysis of the stability of the linear boundary condition for the Black–Scholes equation. Journal of Computational Finance, 8(1).
Goldstein, R., Ju, N., & Leland, H. (2001). An EBIT-based model of dynamic capital structure. Journal of Business, 74(4), 483–512.
Jorde, T. M., Sidak, J. G., & Teece, D. J. (2000). Innovation, investment, and unbundling. Yale Journal on Regulation, 17(1), 1–37.
McDonald, R., & Siegel, D. (1984). Option pricing when the underlying asset earns a below-equilibrium rate of return: a note. Journal of Finance, 39(1), 261–265.
Miao, J. (2005). Optimal capital structure and industry dynamics. Journal of Finance, 60(6), 2621–2659.
Pawlina, G., & Kort, P. M. (2006). Real options in an asymmetric duopoly: Who benefits from your competitive disadvantage? Journal of Economics and Management Strategy, 15(1), 1–35.
Pindyck, R. S. (2004). Mandatory unbundling and irreversible investment in telecom networks (Working Paper 10287). National Bureau of Economic Research, Cambridge, MA.
Pindyck, R. S. (2005a). Pricing capital under mandatory unbundling and facilities sharing (Working Paper 11225). National Bureau of Economic Research, Cambridge, MA.
Pindyck, R. S. (2005b). Sunk costs and real options in antitrust (Working Paper 11430). National Bureau of Economic Research, Cambridge, MA.
Tirole, J. (1989). The theory of industrial organization. Cambridge: MIT Press.
Vogelsang, I. (2003). The German telecommunications reform—where did it come from, where is it, and where is it going? Perspektiven der Wirtschaftspolitik, 4(3), 313–340.
Author information
Authors and Affiliations
Corresponding author
Additional information
Part of this research was carried out in cooperation with Deutsche Telekom AG. Still, the views expressed in this paper are solely those of the authors, and do not necessarily reflect those of Deutsche Telekom AG or its employees. Helpful comments by seminar participants in Berkeley and Bonn are gratefully acknowledged.
Rights and permissions
About this article
Cite this article
Baecker, P.N., Grass, G. & Hommel, U. Business value and risk in the presence of price controls: an option-based analysis of margin squeeze rules in the telecommunications industry. Ann Oper Res 176, 311–332 (2010). https://doi.org/10.1007/s10479-009-0543-2
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10479-009-0543-2