1 / 30

TCOM 546

TCOM 546. Session 1. Course Objective. Provide a broad overview of economic and financial analysis of telecommunications systems Microeconomic analysis Financial and accounting methods Telecommunications cost models Limited math involved Minimize use of calculus. Course Texts.

bradley-walter
Download Presentation

TCOM 546

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. TCOM 546 Session 1

  2. Course Objective • Provide a broad overview of economic and financial analysis of telecommunications systems • Microeconomic analysis • Financial and accounting methods • Telecommunications cost models • Limited math involved • Minimize use of calculus

  3. Course Texts • The Economics of Network Industries, Oz Shy, Cambridge University Press, ISBN 0 0521 80500 7 • Financial Modeling, Simon Benninga, MIT Press, ISBN 0 262 02437 3 • Supplemental readings

  4. Evaluation and Grading • Homework 25% • Term paper/project 25% • Final exam 25% • Class participation (quizzes) 25%

  5. Homework • Collaboration is permitted (encouraged) on homework and papers/projects • But all graded work must be the original effort of the student submitting the material • This means: • Two or more students can develop a solution approach for a homework problem together, • But each student must independently execute the solution • Collaboration in tests or exams is not permitted

  6. Sources • Students are encouraged to use all available sources to answer a question or for a paper/project • All sources must be attributed and material reproduced directly must be enclosed in quotation marks • Students are expected to have a personal computer and Internet access

  7. Course Overview • The subject matter will start at a general level (economic theory) and converge to more specific considerations over the semester • Approximately the first third of the course will consider microeconomic theory – text for this is Shy: Economics of Network Industries

  8. Course Overview (Continued) • Middle part of class will deal with classical financial models – balance sheets, etc., with some spreadsheet examples – Text is Benninga • Final part will deal with cost modeling from a user’s viewpoint – including a case study

  9. Course Overview (Continued) • Week 1: Introduction – Overview of the economics network industries, including welfare aspects and issues specific to telecommunications industries • Week 2: Introductory example: Hardware – computers and compatibility • Week 3: Telecommunications microeconomics– monopolies, new entrants and social welfare

  10. Course Overview (Continued) • Week 4: Telecommunications microeconomics continued – more detailed analyses • Week 5: Broadcasting and information industries microeconomics • Week 6: Introduction to financial statement modeling

  11. Course Overview (Continued) • Week 7: Financial statement modeling continued • Week 8: Valuation using financial statement models • Week 9: Financial analysis of leasing • Week 10: Cost models of telecom from the buyer’s perspective

  12. Course Overview (Concluded) • Week 11: An example of cost modeling for a large telecommunications procurement • Week 12: Course review and recap • Week 13: Student presentations • Week 14: Final Exam

  13. Paper/Project Topics • Students are expected to develop class paper/project topics themselves • Choice of topic subject to approval • If you can’t/don’t want to develop a topic, I will provide one for you • You may not like it

  14. Quizzes • Quizzes will be given in class about every two weeks • They will last approximately half an hour • They will address only material covered to date in class

  15. Level Setting • Experience with • Calculus? • Game theory?

  16. A Question • What is the single most important factor in determining the social utility of a telecom network?

  17. A Question • What is the single most important factor in determining the social utility of a telecom network? • The number of connections it has

  18. Distinctive Characteristics of Network Markets • Externalities • Systems/Complementarity • Costs of change (lock-in) • Economies of scale • Barriers to entry

  19. Externalities • Multiple equilibria possible • Initially few adopters • Achievement of critical mass followed by rapid growth • Sigmoid (logistic) curve y = 1/(1+exp(-x)) • Eventual near-complete market saturation

  20. Two Equilibria Utility Marginal Utility or Cost “Everybody” uses “Nobody” uses Cost Number of Adopters

  21. Complementarity • Elements of system must interoperate successfully • Requires employment of standards

  22. Costs of Change • Contracts (commitment) • Operational familiarity • Acquisition cost • Transition cost • Resources committment • Dual operation • CPE changes

  23. Economies of Scale • Big networks are more cost effective than small ones • Traffic engineering/Erlang • High fixed costs, low variable costs • No stable multi-provider equilibria

  24. Barriers to Entry • Difficult to unseat an incumbent • Specific (and critical) example: Last mile wiring

  25. Natural Monopolies • Characteristics of telecom systems class them as natural monopolies • Natural monopolies tend towards higher prices and lower social welfare than optimal • Violate First Welfare Theorem, which states that equilibrium allocation in a free market is economically efficient • Existence of externalities also invalidates the First Welfare Theorem

  26. Historical Approach • Historical approach to optimizing social welfare under a natural monopoly has been government regulation of a monopoly provider • Limit ability of provider to exceed a “fair” price • Avoid costly duplication of resources (e.g., access wiring) by multiple providers

  27. Problems with Regulatory Approach • Provider unresponsive to customer needs and preferences • E.g., slow introduction of new technology • Failure to control prices • Asymmetric information • Inflated production costs

  28. Current Approach • Attempt to introduce competition • First notable success was U.S. airline deregulation in 1979 • In telecommunications, mixed success • 1984 break-up of the Bell System was quite successful in inducing inter-LATA communications competition • 1996 Telecommunications Reform Act has so far been spectacularly unsuccessful in inducing intra-LATA communications competition

  29. Telecom Price History 140% 120% Commercial Business Line 100% Relative Cost 80% Commercial Long Distance 60% 40% 20% 0% 1983 1987 1991 1995 1999 Year Source: Bureau of Labor Statistics

  30. Homework • Read Shy, Chapters 1 and 2 • We showed graphically how there could be two equilibria in a market. Produce a graphical example with three or more equilibria. Does this example have any reality?

More Related