The option to expand to a next generation access network infrastructure and the role of regulation in a discrete time setting: A real options approach

Serious concerns have been raised, especially across Europe, about the role of regulation in network infrastructure investments. More specifically, the installation of optical fiber closer to customer premises, the so-called next generation access networks, requires massive investments in the face of demand and regulatory uncertainty. The purpose of this paper is to assess whether specific regulatory scenarios (permanent regulation, regulatory forbearance, regulatory holidays and sunset clauses) alter the timing of the investment decision of an incumbent to expand to a new network infrastructure exploiting the binomial lattice approach from real options analysis.

► It is examined how incumbent's financial metrics are altered due to regulatory intervention and competitors presence.
► Binomial lattice method of ROA is exploited within regulator decisions.
► A regulatory holiday can trigger incumbent's expansion to VDSL at the end of holiday season.
► Unregulated phase could be considered as the means to compensate the incumbent for triggering fiercer competition in the xDSL market segment.