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Optimal access pricing for natural monopoly networks when costs are sunk and revenues are uncertain

Clark, Ephraim and Easaw, Joshy 2007. Optimal access pricing for natural monopoly networks when costs are sunk and revenues are uncertain. European Journal of Operational Research 178 (2) , pp. 595-602. 10.1016/j.ejor.2006.02.003

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Abstract

This paper studies optimal access pricing for natural monopoly networks with large sunk costs and uncertain revenues. Using techniques from the option pricing literature, we show that the optimal access price corresponds to a risk-free form of the Efficiency Component Pricing Rule (ECPR), that is, where the opportunity cost is based on the risk free rate of return. We also show that at levels of revenue above the optimal level that triggers entry, the entrant should pay a premium above risk-free ECPR that rewards the incumbent for relinquishing his rights to the risky cash flows at the higher revenue level.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
ISSN: 0377-2217
Last Modified: 13 Jan 2020 14:45
URI: http://orca-mwe.cf.ac.uk/id/eprint/127060

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