Hasan Alkas*
Die Neue Investitionstheorie der Realoptionen und ihre Auswirkungen auf die Regulierung im Telekommunikationssektor
Nr. 234 / März 2002
*Diese Arbeit wurde vom Verfasser während seiner Tätigkeit beim WIK erstellt.
Summary
Strategic considerations by making investments decisions include calculations to react flexible on future developments. Traditional investment concepts, however, do not take such considerations into account since they only capture a single decision in the beginning which is to invest or not. Such an unrealistic approach induced the development of what is called the Real Option Theory. These concepts describe investments as a real dynamic decision process, especially, taking into account decision nodes in the future. Thus option to wait, to innovate, to expand and so on are considered as relevant opportunities.
The general idea of real options is, if there is an option value associated with waiting to invest, there may be an added opportunity cost to investing today and thereby killing the option, which should be taken into account when making investment decisions. In the following study we present the approach of real options. It is the intention to show in which way these concepts may enter into regulatory decisions of a regulator in the field of the telecommunications sector.
The paper is organised as follows: First we present the traditional concepts of investment theory and its main characteristics. Among others these approaches include a comparison of amortisation times, net present value, Tobin’s q and Jorgenson’s user cost of capital. Afterwards we contrast these concepts to the real option approach. We start by laying down the philosophy of the real option approach and demonstrate that uncertainty with regard to future developments and sunk cost properties for investments are crucial for applying the real option approach. The assumption which typically underlie the analysis concerning the capital market will be presented as well as determinants of options and the sensitivity of real options on these parameters. The next issue is how the value of real options is calculated. This leads us to a comparison of financial and real options. Based on the analogy we will derive calculation methods for both discrete and continuous approaches. In what follows we list up the various kinds of options: options- to-wait, option-to-abandon, option-to-expand, option-to-innovate, option-tocontract and option-to-switch. Our main interest in these study is to scrutinise in how far the integration of a real option approach might affect regulatory decisions. Thus, finally we discuss in which way the real option concept may affect the forward looking long run incremental costs which are the basis for regulatory decisions: We discuss in which way real options might be integrated by determining capital costs or whether a new approach has to be developed. Furthermore, we make explicit that regulatory decisions affect the investment of potential newcomers if they base their investment decisions on a real option calculation. The final section is devoted to the issue of practical restrictions on the application of the real option concept. [full version only available in German]
Diskussion Paper is available for download.