The efficiency results of marginal-cost pricing have been used to justify the imposition of regulatory policy tools to determine optimal pricing. In the more sophisticated form, Ramsey pricing methodology is recommended as a pricingpolicy tool. These methods are static. Nevertheless, they are applied to major infrastructure industries such as telecommunications. At best, these methods assume prospective events with certainty; they do not account for stochastic changes in cash flows. However, uncertainty can make a substantial difference in the vector of optimal prices. Moreover, significant sunk (irreversible) costs are incurred by the incumbent firm in these industries. Once the sunk costs are incurred, the firm no longer has the delay option available. This opportunity cost has not been acknowledged by the regulatory community in its pricing decisions. In addition to the neglect of opportunity costs, regulators have additional impacts on the incumbent firm’s cost of capital. In this regard, the regulators ’ principal impact is on the magnitude and cost of the firm’s investment, directly and, perhaps just as importantly, indirectly. We first develop a model with sunk costs which determines the optimal price in the spirit of traditional marginal-cost pricing. This model demonstrates the role of sunk cost in determining opportunity cost for the firm of immediate investment. We use the techniques of real options methodology to analyze the cash flows which in turn have an impact on investment valuations. One uniqueness of the model is allowing the economic depreciation to be determined endogenously, in the spirit of Hotelling, rather than exogenously. The market value of the asset is determined by its prospective cash flows, which in turn determines its depreciation for the period. It is the interaction of stochastic consumer demand with the investment valuations which determines depreciation endogenously. We then solve for the social welfare maximum, namely, the maximization of the discounted value of producer’s and consumers ’ surplus. (Because they fail to note the interaction between demand and economic depreciation, models which assume that depreciation is exogenously determined are in error.) Because the options

The efficiency results of marginal-cost pricing have been used to justify the imposition of regulatory policy tools to determine optimal pricing. In the more sophisticated form, Ramsey-Boiteux pricing methodology is recommended as a pricing-policy tool. These methods are static. Nevertheless, they are applied to major infrastructure industries such as telecommunications. At best, these methods assume prospective events with certainty; they do not account for stochastic changes in cash flows. However, uncertainty can make a substantial difference in the determination of optimal prices. Moreover, significant sunk (irreversible) costs are incurred by the incumbent firm in these industries. Once the sunk costs are incurred, the firm no longer has the delay option available, that is the firm cannot wait-and-watch how the market develops, but must invest immediately. This opportunity cost has not been acknowledged by the regulatory community in its pricing decisions. In addition to the neglect of opportunity costs, regulators have additional impacts on the incumbent firm’s cost of capital. We first develop a model with sunk costs which determines the optimal price in the spirit of

Interconnection – what could be the interest in interconnection? It turns out that interconnection is pivotal in determining market structure, the viability of competitors and the success of deregulatory programs. Interconnecting the Network of Networks by Professor Eli Noam (2001) provides a remarkable review of the issues surrounding this topic. Interconnection’s importance is clear upon a moment’s reflection. In today’s society, we have mobile telephones talking to subscribers on wireline networks; the same mobile phone can read e-mail messages, and surf the web. Computers, via voice over internet protocol (VoIP), can be used to replace the traditional phone over broadband cable connections. The list goes on… The book is an omnibus approach to the subject. It begins with a brief history of the industrial segment and interconnection’s role in the development of the telecommunications industry’s structure. From the beginning of the telecommunications industry, starting with the telegraph, interconnection has been important in ensuring the connectivity of networks. In 1865, the predecessor of the International Telecommunication Union was formed to ensure interconnection of telegraph service across national boundaries. The issues related to network access have become more critical in the age of multiple communications technologies – internet, mobile phone, WiFi (80211.b) wireless networks, wide and local area networks (WANs and LANs), satellite systems, cable broadband – all of which are capable of

The efficiency results of marginal-cost pricing have been used to justify the imposition of regulatory policy tools to determine optimal pricing. In the more sophisticated form, Ramsey pricing methodology is recommended as a pricingpolicy tool. These methods are static. Nevertheless, they are applied to major infrastructure industries such as telecommunications. At best, these methods assume prospective events with certainty; they do not account for stochastic changes in cash flows. However, uncertainty can make a substantial difference in the vector of optimal prices. Moreover, significant sunk (irreversible) costs are incurred by the incumbent firm in these industries. Once the sunk costs are incurred, the firm no longer has the delay option available. This opportunity cost has not been acknowledged by the regulatory community in its pricing decisions. In addition to the neglect of opportunity costs, regulators have additional impacts on the incumbent firm’s cost of capital. In this regard, the regulators ’ principal impact is on the magnitude and cost of the firm’s investment, directly and, perhaps just as importantly, indirectly. We first develop a model with sunk costs which determines the optimal price in the spirit of traditional marginal-cost pricing. This model demonstrates the role of sunk cost in determining opportunity cost for the firm of immediate investment. We use the techniques of real options methodology to analyze the cash flows which in turn have an impact on investment valuations. We then solve for the social welfare maximum, namely, the maximization of the discounted value of producer’s and consumers ’ surplus. 1 Because the options values/opportunity costs are not recognized in a static view of the world, the resultant price vectors of the traditional models are a poor policy guide. Without regulatory constraints, the model shows that the uncertainty prices differ significantly from the results of both the traditional marginal-cost price and the