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E. P. Techno - Economics & Policy Program. 2004 ITS conference. Optimal Spectrum Policy : A Real Option and Game Theoretic Approach. Seoul National University Ph. D. Candidate Tae-Ho Lyoo 2004. 9. 6. E. P. ……. Introduction. Methodology. Real option approach.

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Techno economics policy program

E

P

Techno - Economics & Policy Program

2004 ITS conference

Optimal Spectrum Policy :

A Real Option and Game

Theoretic Approach

Seoul National University

Ph. D. Candidate

Tae-Ho Lyoo

2004. 9. 6.


Techno economics policy program

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Introduction

Methodology

Real option approach

Game theoretic approach

Model

Firm’s perspective

Social welfare’s perspective

Illustrative application

Market background

Analysis and results

Policy implications

Future works

Q & A

Techno - Economics & Policy Program

Seoul National University

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CONTENTS

CONTENTS


Techno economics policy program

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Motivation

Increasing need

Indispensable source for commercializing the ICT

New services : wireless local loop, broad wireless local loop

Limited spectrum resource

Technology approach → policy approach

Allocating new spectrum bandwidth

Redistributing bandwidth

Valuation of spectrum bandwidth

To optimally distribute the spectrum

Stationary method → dynamic method

Techno - Economics & Policy Program

Seoul National University

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Introduction

Introduction

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


Techno economics policy program

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Traditional valuation methods

methods income approach cost approach market approach

concept

• future revenue • invested cost • similar transaction

• focus on the • pretty easy • tradable price can

expected cash flow be calculated

merit

• can be subjective • not regard the • difficult to find similar

• parameter error future revenue cases

demerit

applications

• patent right • atomic reactor • corporeal property

• trademark right • power plant • real estate

• royalty contract • business practical • franchise

• license

Techno - Economics & Policy Program

Seoul National University

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Methodology

Methodology

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


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Importance of understanding uncertainty

Dynamic changes of business circumstances

DCF (discounted cash flow) disadvantages

Investments are now-or-never decisions

Managers are passive

Real option approach

Consider management flexibility

Added information, reduced uncertainty

Consider strategy variation

Commercialization

Techno - Economics & Policy Program

Seoul National University

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Methodology

Methodology

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


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V>K

spend K

go

+G

success

V<K

save K

lose X

R&D

stop

zero G

(lose X)

failure

X : R&D expenditure, K : commercialization cost at t

V : discounted cash flow at t

Techno - Economics & Policy Program

Seoul National University

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Methodology

Methodology

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A

Source : Ottoo, R. E ,1998


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Simple strategy for player i in the game starting at time t is a pair of

real-valued functions ( , )

(s) is the cumulative probability that player i has moved by time s

given that both players have not moved before time s

(s) measures the intensity of atoms in the intervals[s, s + ds].

firm2

(M(Y(m), M(Y(m)))

(L(Y(m)),F(Y(m)))

firm1

(F(Y(m)),L(Y(m)))

Repeat game

(s)( (s)) should be interpreted as the probability that firm 1(2)

chooses row(column)1 in the matrix game

Techno - Economics & Policy Program

Seoul National University

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Methodology

Methodology

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


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The mixed strategies equilibriafor the low cost firm

M : monopoly, L : leader group, F : follower group

Techno - Economics & Policy Program

Seoul National University

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Methodology

Methodology

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


Techno economics policy program

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Firm’s perspective

Firms are non-homogenous

Each firm has lower operational cost than the other for

the same investment

Firms are risk neutral with constant discount factor r

Sunk cost to adopt the new technology equals I

Profit flow of firm i

Y(t) follows a geometric Brownian motion process

Demand function is assumed as a linear function

Techno - Economics & Policy Program

Seoul National University

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Model

Model

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


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Follower threshold for the high cost firm,

is a dividend yield, is a operating cost of high cost firm, is a

operating cost of low cost firm, and is the positive root of equation

Follower value of the high cost firm

Techno - Economics & Policy Program

Seoul National University

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Model

Model

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


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Follower Strategy of timing to invest

Leader value for the low cost firm

Leader threshold value

is the value of making high cost firms values as like this

is the monopolistic threshold value

Techno - Economics & Policy Program

Seoul National University

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Model

Model

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


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Social welfare’s perspective

If an amount is added to capacity, a cost equal to is incurred

Social planner’s objective function is

Let denote the maximized value of the objective function

The first term is the value placed by society on its options to

expand this industry

The second term, is the sum of the values in place of all the

installed units.

Techno - Economics & Policy Program

Seoul National University

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Model

Model

Introduction

Methodology

Model

Application

Implication

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Q & A


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Maximized value of the objective function

Techno - Economics & Policy Program

Seoul National University

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Model

Model

Introduction

Methodology

Model

Application

Implication

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References

Q & A


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Digital Multimedia Broadcasting (DMB)

Diverged, personal multimedia service

Enabling CD-quality audio and seamless video even

in vehicle or train

Anytime, anywhere

Terrestrial DMB

Analogue 1 channel → TV 3 channels, FM 9 channels

Use VHF channel 8(80~186MHz), 12(204~210MHz)

Satellite DMB

Can offer 39 channels of quality multimedia entertainment

Techno - Economics & Policy Program

Seoul National University

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Application

Application

Introduction

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Model

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Implication

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Market background

A company has a plan to begin and offer multimedia services late on Sep. 2004.

They had already applied to the ITU for satellite orbit registration, and allowed to

use the bandwidth from the region of 2.630~2.655GHz. They successfully

launched the world's first satellite for DMB to the blast-off site on March 2004. Its

launch has great significance in securing a leadership role in the satellite DMB

market. Recently, government announced that they distributed the bandwidth

for satellite DMB to S company for 12 years with a price of 7.2~8.5 billion won

Another important company in satellite DMB business in ROK, K company wants

to take part in the satellite DMB business. By the way they are hesitated to make

a decision thoroughly, because there is so much uncertainty including their own

company’s issue, satellite DMB business’s environment, and its uncertain policies.

ROK government has not yet made a decision to select DMB service providers,

and complete the revision of DMB-related broadcasting laws. Therefore, S

company has not yet obtained any preliminary business license from the

government. So the timing of S company’s satellite DMB service launch this year

is not certain due to the delay in revision of the Korean Broadcasting

Techno - Economics & Policy Program

Seoul National University

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Accessible Domestic DMB bandwidth

Issues in satellite DMB business

Operator position, business participation limit, accessible

number of channels, operator selection method,

number of operators, timing of operator selection, and

its standardization problems

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Seoul National University

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Model

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Assumption and data

Set satellite DMB business as an asymmetric duopoly market

Asymmetric is derived from the different operating cost

Data (million won, $1 = 1200 won)

, is estimated by using the data of NATE service’s

monthly subscribers

Data’s period is 2001.12~2004.5

Parameters are estimated by MLE

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Data for inverse demand function (people, won)

The inverse demand function is set such as

Techno - Economics & Policy Program

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Techno economics policy program

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Techno - Economics & Policy Program

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Results

Introduction

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Model

Firm

Value

Application

Implication

Future works

References

Q & A

Y Value


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reaches value, high cost follower has an incentive to enter the

market

The time of reaching value is . Its value is 37 months

later

If we assume a monopoly

is 1.003

In the region of , the value is higher than the low cost

leader firm’s value

Techno - Economics & Policy Program

Seoul National University

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Threshold value for low cost firm’s investing timing

Firm

value

Y Value

Leader threshold value

= 0.79503

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Low cost leader enters into market, when reaches 0.7950

If the initial value of is below 0.7950, neither firm will invest

The low cost leader enters the market with the current demand

At the ,the social welfare value is million won

Option value( )has more portion than the value

in place of all the installed units in total value

Bigger than the sum of each firm’s value at the

In the case of monopoly

Social welfare value, calculated at the , produces

million won

Techno - Economics & Policy Program

Seoul National University

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The value of is 3.37129, and the time of reaching value is

37 months later.

By comparing a social welfare value in monopoly with a

value in duopoly, policy maker has to let the follower enter

into market to maximize the social welfare.

If we do not consider the option value, the result can be

opposed to that. Without considering of the option value the

firm’s value would be underestimated

Can be in a better position than other country without

spectrum bandwidth valuation tool

Techno - Economics & Policy Program

Seoul National University

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Implication

Implication

Introduction

Methodology

Model

Application

Implication

Future works

References

Q & A


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Find the relationship between the quantity of usage

bandwidth and operating cost to calculate the optimal

operating costs

Policy maker can help each firm to achieve that level of operating

cost by setting some policy such as using some equipment altogether

to reduce an operating cost.

Find the optimal number of satellite DMB business operators

without the assumption of duopoly,

Using a compound option, a comprehensive analysis of the

bandwidth with the other services will be an essential issue

for policy makers

Techno - Economics & Policy Program

Seoul National University

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Future works

Future works

Introduction

Methodology

Model

Application

Implication

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References

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A. Dixit and R. S. Pindyck, Investment Under Uncertainty, Princeton University Press, Princeton,

N. J., 1994.

S. R. Grenadier, “Option Exercise Games: An Application to the Equilibrium Investment

Strategies of Firms”, Review of Financial Studies, vol.15, Summer 2002, pp. 691-721.

S. R. Grenadier, “Option Exercise Games: The Intersection of Real Options and Game Theory”,

Journal of Applied Corporate Finance 13, 2000, pp. 99-107

K. J. M. Huisman, Technology Investment: A Game Theoretic Real Options Approach, Kluwer

Academic Pub., Boston(MA, USA), 2001

Ottoo, R.E., 1998, “Valuation of Internal Growth Opportunities : The Case of a Biotechnology

company,” The Quarterly Review of Economics and Finance 38, 615-633

E. Schwartz, L Trigeorgis, Real Options and Investment under Uncertainty: Classical Readings

and Recent Contrbutions, MIT Press, Campridge, MA., 2001

Dastidar, K.G.,2003, “ On Stackelberg Games in a Homogeneous Product Market,” European

Economic Review

R. S. Pindyck, “Irreversible Investment, Capacity Choice, and the Value of the Firm”, American

Economic Review 78, pp. 969-985

H. T. J. Smit, “Infrastructure Investment as a Real Options Game: The case of European Airport

Expansion”, Financial Management, winter , pp. 5-35, 2003

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Seoul National University

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Introduction

Methodology

Model

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Implication

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Techno economics policy program

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Techno - Economics & Policy Program

Seoul National University

Introduction

Methodology

Model

Application

Q & A

Implication

Q & A

Future works

References

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Q & A


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