Investments and Network Competition

Tommaso Valletti and Carlo Cambini

No 3829, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: L41 L96 (search for similar items in EconPapers)
Date: 2003-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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Journal Article: Investments and Network Competition (2005)
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