Investments and Network Competition

37 Pages Posted: 13 May 2003

See all articles by Carlo Cambini

Carlo Cambini

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

Tommaso M. Valletti

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

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Date Written: March 2003

Abstract

This Paper analyses the incentives that operators have to invest in facilities with different levels of quality. A network of better quality is more expensive but may give an important edge to an operator when competing against a rival. We extend the framework of Armstrong-Laffont-Rey-Tirole by introducing an investment stage, prior to price competition. We show that the incentives to invest are influenced by the way termination charges are set. In particular, 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. 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 the rival.

Keywords: Telecommunication, interconnection, two-way access charges, investment quality

JEL Classification: L41, L96

Suggested Citation

Cambini, Carlo and Valletti, Tommaso M., Investments and Network Competition (March 2003). CEPR Discussion Paper No. 3829. Available at SSRN: https://ssrn.com/abstract=407082

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 )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Tommaso M. Valletti (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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