Investments and Network Competition

38 Pages Posted: 4 Jun 2003

See all articles by Tommaso M. Valletti

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Carlo Cambini

Politecnico di Torino & EUI - Florence School of Regulation; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2003

Abstract

This paper analyzes the incentives that network operators have to invest in facilities with different levels of quality. We extend the framework of Armstrong-Laffont-Rey-Tirole by introducing an investment stage, prior to price competition, and we study the dynamic aspects of two-way access charge regulation. When the quality of a network has an impact on all calls initiated by own customers (destined both on-net and off-net), we obtain a result of "tacit collusion" even in a symmetric model with two-part pricing. Firms tend to under-invest in quality, and this would be exacerbated if they can negotiate reciprocal termination charges above cost. On the contrary, below-cost access charges would improve social welfare. We also show that when the quality of off-net calls depends on the interaction between the quality of the two networks, there is another serious problem, namely that no network has an incentive to jump ahead of its rival by investing more.

Keywords: Telecommunications, Interconnection, Two-way Access Charges, Investment, Quality

JEL Classification: L41, L96

Suggested Citation

Valletti, Tommaso M. and Cambini, Carlo, Investments and Network Competition (April 26, 2003). Available at SSRN: https://ssrn.com/abstract=399220 or http://dx.doi.org/10.2139/ssrn.399220

Tommaso M. Valletti (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
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United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Carlo Cambini

Politecnico di Torino & EUI - Florence School of Regulation ( email )

Corso Duca degli Abruzzi, 24
Torino, Torino 10129
Italy
+390115647292 (Phone)
+390115647299 (Fax)

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

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50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

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