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Investments and Network Competition

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Author Info
Cambini, Carlo
Valletti, Tommaso

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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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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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Find related papers by JEL classification:
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring. [Downloadable!] (restricted)
  2. Armstrong, M., 1996. "Network Interconnection," Discussion Paper Series In Economics And Econometrics 9625, Economics Division, School of Social Sciences, University of Southampton.
  3. Economides, Nicholas, 1999. "Quality choice and vertical integration," International Journal of Industrial Organization, Elsevier, vol. 17(6), pages 903-914, August. [Downloadable!] (restricted)
    Other versions:
  4. Gans, Joshua S. & King, Stephen P., 2001. "Using 'bill and keep' interconnect arrangements to soften network competition," Economics Letters, Elsevier, vol. 71(3), pages 413-420, June. [Downloadable!] (restricted)
    Other versions:
  5. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany. [Downloadable!]
  6. Peitz, Martin, 2005. "Asymmetric access price regulation in telecommunications markets," European Economic Review, Elsevier, vol. 49(2), pages 341-358, February. [Downloadable!] (restricted)
  7. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May. [Downloadable!] (restricted)
  8. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Edmond Baranes, 2006. "Bundling and Collusion on Communications Markets," Working Papers 06-17, NET Institute, revised Oct 2006. [Downloadable!]
  2. Bijl, P.W.J. de & Peitz, M., 2004. "Dynamic regulation and entry in telecommunications markets : a policy framework," Discussion Paper 010, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  3. Hurkens, Sjaak & Jeon, Doh-Shin, 2009. "Mobile Termination and Mobile Penetration," IDEI Working Papers 575, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  4. Edmond Baranes & Laurent Flochel, 2008. "Competition in telecommunication networks with call externalities," Journal of Regulatory Economics, Springer, vol. 34(1), pages 53-74, August. [Downloadable!] (restricted)
  5. Felix Höffler, 2009. "Mobile termination and collusion, revisited," Journal of Regulatory Economics, Springer, vol. 35(3), pages 246-274, June. [Downloadable!] (restricted)
  6. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," Working Papers 08-03, NET Institute, revised Sep 2008. [Downloadable!]
    Other versions:
  7. Calzada, Joan & Valletti, Tommaso, 2005. "Network Competition and Entry Deterrence," CEPR Discussion Papers 5381, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Yu-Shan Lo, . "Market Shares, Consumer Ignorance and the Reciprocal Termination Charges," Discussion Papers 09/19, Department of Economics, University of York. [Downloadable!]
  9. Pio Baake & Kay Mitusch, 2009. "Mobile phone termination charges with asymmetric regulation," Journal of Economics, Springer, vol. 96(3), pages 241-261, April. [Downloadable!] (restricted)
    Other versions:
  10. Cambini, Carlo & Valletti, Tommaso, 2005. "Information Exchange and Competition in Communications Networks," CEPR Discussion Papers 5031, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Sjaak Hurkens & Doh-Shin Jeon, 2009. "Mobile Termination and Mobile Penetration," Economics Working Papers 1166, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  12. Joan Calzada & Francesc Trillas, 2005. "The interconnection prices in telecomunications: from theory to practice," Hacienda Pública Española, IEF, vol. 173(2), pages 85-125, June. [Downloadable!]
  13. Doh-Shin Jeon & Sjaak Hurkens, 2007. "A Retail Benchmarking Approach to Efficient Two-way Access Pricing: Two-Part Tariffs," Working Papers 07-11, NET Institute, revised Sep 2007. [Downloadable!]
  14. Stennek, Johan & Tangerås, Thomas P., 2007. "Competition vs. Regulation in Mobile Telecommunications," CEPR Discussion Papers 6073, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  15. Elisabetta Iossa & Francesca Stroffolini, 2008. "Vertical Integration and Costly Demand Information in Regulated Network Industries," CEDI Discussion Paper Series 08-03, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
  16. Pekka Sääskilahti, 2006. "STRATEGIC R&D AND NETWORK COMPATIBILITY †," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 15(8), pages 711-733, November. [Downloadable!] (restricted)
  17. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA. [Downloadable!]
  18. David Gilo & Yossi Spiegel, 2003. "Network Interconnection With Competitive Transit," Working Papers 03-05, NET Institute, revised Dec 2003. [Downloadable!]
  19. Harbord, David & Pagnozzi, Marco, 2008. "On-Net/Off-Net Price Discrimination and 'Bill-and-Keep' vs. 'Cost-Based' Regulation of Mobile Termination Rates," MPRA Paper 14540, University Library of Munich, Germany. [Downloadable!]
  20. Johan Stennek & Thomas TangerŒs, 2008. "Competition vs. Regulation in Mobile Telecommunications," Working Papers 08-09, NET Institute, revised Sep 2008. [Downloadable!]
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