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Investments and Network Competition

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  • Cambini, Carlo
  • Valletti, Tommaso

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3829.

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Date of creation: Mar 2003
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Handle: RePEc:cpr:ceprdp:3829

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Related research

Keywords: interconnection; investment quality; telecommunication; two-way access charges;

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References

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  1. Gans, J.S. & King, S.P., 2000. "Using 'Bill and Keep' Interconnect Arrangements to Soften Network Competiti on," Department of Economics - Working Papers Series 739, The University of Melbourne.
  2. Nicholas Economides, 1994. "Quality Choice and Vertical Integration," Working Papers 94-22, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
  4. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
  5. Cambini, Carlo & Valletti, Tommaso M., 2003. "Network competition with price discrimination: 'bill-and-keep' is not so bad after all," Economics Letters, Elsevier, vol. 81(2), pages 205-213, November.
  6. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
  7. Peitz, Martin, 2005. "Asymmetric access price regulation in telecommunications markets," European Economic Review, Elsevier, vol. 49(2), pages 341-358, February.
  8. Armstrong, M., 1996. "Network interconnection," Discussion Paper Series In Economics And Econometrics 9625, Economics Division, School of Social Sciences, University of Southampton.
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