Welfare Analysis of Network Public Utility Industries : A Real Options Approach

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The purpose of the research project is to provide a welfare analysis of network public utility industries, like electricity, telecommunication, natural gas, etc., through a real options approach. The contributions made by the research project are presented in the following two papers.1. Cooperative investment of local network owners under an access pricing ruleThis paper examines a competitive environment among network owners. It studies their strategic opportunities to invest in network facility under access pricing based on access costs, and then compares a cooperative investment regime with a non-cooperative investment regime. The analysis recommends a policy mix between the access pricing and the investment regime to achieve a desirable network-industry environment. When the access pricing involves a higher (lower) proportion level of access costs, the cooperative investment regime achieves higher (lower) social welfare than the non-cooperative investment regime.2. From access to bypass : a real options approachThis paper examines firms' incentives for irreversible investments in network industries under uncertainty. We characterize an entrant's strategy choice in terms of an access charge premium and an incremental profit flow accrued from access to bypass. It is shown that an introduction of competition in network industries contributes to an enhancement of consumer welfare in the sense that the timing of entry becomes earlier with competition than without competition. In addition, we ensure that allowing the opportunity to have access to an incumbent's network facility makes an entrant's incentive to construct a bypass weak. The effect of access charge on the investment is also discussed.