Stochastic models for telecom commodity prices

Bandwidth is becoming commoditized and markets are starting to appear. Potential behaviors of these markets are not yet understood because these markets are still in the early stages of development. This is re¯ected in the lack of current research on the structure and dynamics of network commodity market prices. We present a method for constructing telecom commodity spot price processes as a ®rst step for understanding these developing markets. Band-width, like electricity, is not storable so we draw inspiration from electricity prices and models. However, unique network features of telecommunications require speci®c inclusion. These are geographical substitution (arbitrage), quality of service (QoS), and the continuing pace of technological development. Developing liquidity acts as a further complication. Thus we model price development as a combination of link price processes modi®ed by prices for equivalent QoS routes. We demonstrate our method on a simple triangular network topology and characterize a network contract graph derived from more than 10 major carrier backbones and new entrant networks. Our results cover the existence and value of arbitrage opportunities together with their e€ect on price development and network value (NPV). Application of this work ranges from network design to infrastructure valuation and construction of real options.