Techno - Economics & Policy Program

1. 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.

2. E P .. …… 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 .. CONTENTS CONTENTS

3. E P .. …… 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 .. Introduction Introduction Introduction Methodology Model Application Implication Future works References Q & A

4. E P .. …… 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 .. Methodology Methodology Introduction Methodology Model Application Implication Future works References Q & A

5. E P .. …… 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 .. Methodology Methodology Introduction Methodology Model Application Implication Future works References Q & A

6. E P .. …… 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 .. Methodology Methodology Introduction Methodology Model Application Implication Future works References Q & A Source : Ottoo, R. E ,1998

7. E P .. …… 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 .. Methodology Methodology Introduction Methodology Model Application Implication Future works References Q & A

8. E P .. …… The mixed strategies equilibriafor the low cost firm M : monopoly, L : leader group, F : follower group Techno - Economics & Policy Program Seoul National University .. Methodology Methodology Introduction Methodology Model Application Implication Future works References Q & A

9. E P .. …… 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 .. Model Model Introduction Methodology Model Application Implication Future works References Q & A

10. E P .. …… 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 .. Model Model Introduction Methodology Model Application Implication Future works References Q & A

11. E P .. …… 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 .. Model Model Introduction Methodology Model Application Implication Future works References Q & A

12. E P .. …… 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 .. Model Model Introduction Methodology Model Application Implication Future works References Q & A

13. E P .. …… Maximized value of the objective function Techno - Economics & Policy Program Seoul National University .. Model Model Introduction Methodology Model Application Implication Future works References Q & A

14. E P .. …… 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 .. Application Application Introduction Methodology Model Application Implication Future works References Q & A

15. E P .. …… 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 .. Application Application Introduction Methodology Model Application Implication Future works References Q & A

16. E P .. …… 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 Techno - Economics & Policy Program Seoul National University .. Application Application Introduction Methodology Model Application Implication Future works References Q & A

17. E P .. …… 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 Techno - Economics & Policy Program Seoul National University .. Application Application Introduction Methodology Model Application Implication Future works References Q & A

18. E P .. …… Data for inverse demand function (people, won) The inverse demand function is set such as Techno - Economics & Policy Program Seoul National University .. Application Application Introduction Methodology Model Application Implication Future works References Q & A

19. E P .. …… Techno - Economics & Policy Program Seoul National University .. Application Application Results Introduction Methodology Model Firm Value Application Implication Future works References Q & A Y Value

20. E P .. …… 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 .. Application Application Introduction Methodology Model Application Implication Future works References Q & A

21. E P .. …… Threshold value for low cost firm’s investing timing Firm value Y Value Leader threshold value = 0.79503 Techno - Economics & Policy Program Seoul National University .. Application Application Introduction Methodology Model Application Implication Future works References Q & A

22. E P .. …… 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 .. Application Application Introduction Methodology Model Application Implication Future works References Q & A

23. E P .. …… 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 .. Implication Implication Introduction Methodology Model Application Implication Future works References Q & A

24. E P .. …… 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 .. Future works Future works Introduction Methodology Model Application Implication Future works References Q & A

25. E P .. …… 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 Techno - Economics & Policy Program Seoul National University .. References References Introduction Methodology Model Application Implication Future works References Q & A

26. E P …… Techno - Economics & Policy Program Seoul National University Introduction Methodology Model Application Q & A Implication Q & A Future works References .. Q & A