Estimating the Option Value of Waiting: A Dynamic Entry Game of the U.S. Local Telephone Competition

Abstract

We estimate a dynamic oligopoly entry game in the early U.S. local telephone market. We observe the identities of potential entrants into local markets and therefore the waiting time of each potential entrant before it commits actual entry. To capture the feature of the data, we allow firms to be heterogeneous long run players who have option value of waiting. We find that firm-level heterogeneity in entry costs plays a significant role in determining a firm's entry behavior into a local market. Our model can be used to conduct counterfactual simulations to understand the effectiveness of subsidy policies with different focuses.

Keywords: Option Value of Waiting, Entry, Dynamic Oligopoly Entry Game, Telecommunications

JEL Classification: L1, L96