| Long-haul telecommunications services possess characteristics that are not shared by most other commodity goods---telecommunications services generally can be provided at negligible marginal cost, cannot be stored, and can be supplied between pairs of nodes over numerous routes. Numerous decisions must be made to supply the long-haul telecommunications services, and can generally be divided into decisions relating to the structure and capacity of the network, and decisions relating to routing bandwidth over the network. Many of these decisions can be deferred into the future, after additional information is obtained, and are examples of flexibility in decision making, or real options. This dissertation advances the study of real options in long-haul telecommunications networks in two directions and provides explanations for the wholesale bandwidth bubble and bust. First, we study real options using a single-facility capacity expansion framework. Under a monopoly market structure, we find that the value of the lead time option is monotonically increasing in the size of the lead time option and that the capacity expansion contract indifference price is monotonically decreasing in the size of the capacity expansion contract, and lower than the future cost of capacity. In contrast, under a duopoly market structure we find that the capacity expansion contract indifference price may exceed the future cost of capacity, as the benefit of preemption may outweigh the value of the real option to delay the capacity expansion decision. Next, we study real options using a network capacity expansion framework. We fund that it may be optimal to add capacity over a link even if the expected price of bandwidth between the pair of nodes is less than the marginal cost of adding capacity over the link, due to the optionality provided by capacity over the link. Finally, we provide explanations for the wholesale bandwidth bubble and bust, introducing "The Curse of Efficiency", which is the phenomenon where the industry's profitability declines as firms in the industry become more efficient. |
