Essays on optional calling plan contracts in the telecommunications industry

Abstract

For the last decades, optional calling plans in utility industries have been received increased attention from regulators and economists and a voluminous literature has grown up on the topic. While this has been done much to facilitate our understanding, much remains to be explored, one of which is inconsistency between standard economic theory and actual customers behavior. This thesis presents a methodology in evaluating a fair subscription price for various optional calling plans. By applying contingent claims analysis to the valuation problem of optional calling plan, we not only derive a fair price of subscription on an optional calling plan independent of risk preference but also provide a useful guideline for telephone companies in designing price scheme and assessing customer``s behavior. We also analyze another related issue, a callback services which is one of the most intriguing phenomena to hit the telephone industry. The organization of this thesis is as follows. Chapter 2 explains overall shape of telecommunication industry including services of various kinds and the pricing structures and summarizes various optional calling plans provided by telephone companies. We also review the literature on real option theory and address a possibility that contingent claims approach brings a fresh insight for the pending issues. Chapter 3 analyzes customers`` choice behavior when they face a choice among optional tariffs under future demand uncertainties. For this, we apply contingent claims analysis in financial economics. We present a valuation model that yields a fair value of Flat-Rate-Service subscription, and show that i) in equilibrium, customers always choose an optional tariff that is optimal for them. ii) customers may subscribe to Measured-Service even when his expected call charge is less than the subscription price, viewed ex-post and vice versa. iii) customers gain nonnegative benefit from providing optional tariffs. Chapter 4 presents a val...