Real options and cost-based access pricing: Model and methodology

This paper proposes a model and methodology for valuing the option to delay network investment decisions and calculating cost-based access prices. It argues that an option value multiple must be applied to the investment cost component of each network element in order to account for the value of the delay option that is extinguished at the time of investment. Option value multiples are calculated for the investment decision in three main network elements, each representing a different part of the Brazilian fixed telecommunications network, subject to different technological and demand uncertainties. After applying the markup factors, network costs must be assigned to network services on the basis of how much each service uses each network element.