For the last decades, optional calling plans in utility industries have been received increased attention from regulators and economists and a voluminous literature has grown up on the topic. While this has been done much to facilitate our understanding, much remains to be explored, one of which is inconsistency between standard economic theory and actual customers behavior.
This thesis presents a methodology in evaluating a fair subscription price for various optional calling plans. By applying contingent claims analysis to the valuation problem of optional calling plan, we not only derive a fair price of subscription on an optional calling plan independent of risk preference but also provide a useful guideline for telephone companies in designing price scheme and assessing customer's behavior. We also analyze another related issue, a callback services which is one of the most intriguing phenomena to hit the telephone industry.
The organization of this thesis is as follows. Chapter 2 explains overall shape of telecommunication industry including services of various kinds and the pricing structures and summarizes various optional calling plans provided by telephone companies. We also review the literature on real option theory and address a possibility that contingent claims approach brings a fresh insight for the pending issues.
Chapter 3 analyzes customers' choice behavior when they face a choice among optional tariffs under future demand uncertainties. For this, we apply contingent claims analysis in financial economics. We present a valuation model that yields a fair value of Flat-Rate-Service subscription, and show that i) in equilibrium, customers always choose an optional tariff that is optimal for them. ii) customers may subscribe to Measured-Service even when his expected call charge is less than the subscription price, viewed ex-post and vice versa. iii) customers gain nonnegative benefit from providing optional tariffs.
Chapter 4 presents a valuation methodology for popular variants of the optional calling plan contracts on free-phone calls in the telephone industry. By examining an actual optional calling plan we show that a lack of consideration for risk in taking the optional calling plan contract leads to a consistent under-valuation of the customer's benefit from subscribing to the contract and to an underestimation of subscription demand.
Chapter 5 investigates an optional calling plan related issue, an international callback services which has previously brought much disputes and conflicts. Whereas the existence of callback services has been attributed to a rate disparity between countries, we show that it can arise either from the inefficiency of domestic markets or from the carriers' flexibility in optional calling plans providing substantial discount and the accounting rate which is far from cost-based. We also analyze why conflicts occur among the agents with respect to the legitimacy of callback services by comparing international telephony markets before and after the introduction of callback services.
