This paper addresses the question of how the competitive situation in the downstream market, the services, and the innovative activity in the upstream market, the network infrastructure, interact. The focus is on the vertical structure of the telecommunication market, which is analysed in the framework of a patent licensing model. The paper considers an integrated network provider who can implement a new technology for the network which reduces the costs of offering services over the network. This provider can charge a mark-up above the new lower cost level from the service providers for the use of the new technology. The level of the mark-up is determined by a regulator who aims at promoting innovation. It can be shown that the network provider’s incentive to innovate increases with the number of competitors, given that the mark-up is sufficiently high. Hence, there exists a range for the mark-up where increasing competition in the service market and more innovative investment in the network infrastructure can be achieved simultaneously.
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Paper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number
Ifo Working Paper No. 64.
Find related papers by JEL classification: L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
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Kamien, Morton I., 1992.
"Patent licensing,"
Handbook of Game Theory with Economic Applications,
in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 11, pages 331-354
Elsevier.
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