Stepping Stone or Stonewall? Progressive Entry and the Incentives to Invest in Alternative Infrastructures

Abstract:     
In this paper we study how a phase of service-based competition during which a new entrant operator leases access to an incumbent operator's network affects the entrant's incentives to build an alternative infrastructure. In line with the "stepping stone" and "ladder of investment" arguments, we build a framework in which the phase of service-based competition allows the entrant to step into the market by progressively acquiring market experience and market shares. We show that, contrary to conventional wisdom, the acquisition of market experience in a phase of service-based competition may delay facility-based entry, when the prospects for facility-based entry are good. We also show that when the acquisition of experience depends on the entrant's current customer base, increasing the access charge can retard facility-based entry.

Number of Pages in PDF File: 35

Keywords: Stepping stone, Ladder of investment, Facility-based competition

JEL Classification: L51, L96

working papers series