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

25 Pages Posted: 20 Oct 2010

See all articles by Ying Fan

Ying Fan

University of Michigan

Mo Xiao

University of Arizona - Eller College of Management - Department of Economics

Date Written: September 30, 2010

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

Suggested Citation

Fan, Ying and Xiao, Mo, Estimating the Option Value of Waiting: A Dynamic Entry Game of the U.S. Local Telephone Competition (September 30, 2010). NET Institute Working Paper No. 10-14. Available at SSRN: https://ssrn.com/abstract=1694314 or http://dx.doi.org/10.2139/ssrn.1694314

Ying Fan (Contact Author)

University of Michigan ( email )

611 Tappan Street
Lorch Hall, Rm 308
Ann Arbor, MI 48109-1220
United States

HOME PAGE: http://www-personal.umich.edu/~yingfan/

Mo Xiao

University of Arizona - Eller College of Management - Department of Economics ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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