Network Investment and the Threat of Regulation – Preventing Monopoly Exploitation or Infrastructure Construction?
AbstractIn summer 2005, the German telecommunication incumbent Deutsche Telekom announced its plans to build a new broadband fibre optics network. Deutsche Telekom decided as precondition for this new network not to be regulated with respect to pricing and third party access. To develop a regulator's strategy that allows investments and prevents monopolistic prices at the same time, we model an incumbent's decision problem under a threat of regulation in a game-theoretical context. The decision whether to invest or not depends on the probability of regulation and its assumed impact on investment returns. Depending on the incumbent's expectation on these parameters, he will decide if the investment is favourable, and which price to best set. This price is below a non-regulated profit maximising price, since the incumbent tries to circumvent regulation. Thus, we show that the mere threat of a regulator's intervention might prevent supernormal profits without actual price regulation. The regulator, on the other hand, can influence both investment decision and the incumbent's price via his signals on regulation probability and price. These signals an be considered optimal, if they simultaneously allow investment and minimize the incumbent's price.
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Bibliographic InfoPaper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 7.
Date of creation: May 2006
Date of revision:
regulation; investment; telecommunication; network industries;
Find related papers by JEL classification:
- L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-13 (All new papers)
- NEP-COM-2006-05-13 (Industrial Competition)
- NEP-CSE-2006-05-13 (Economics of Strategic Management)
- NEP-MIC-2006-05-13 (Microeconomics)
- NEP-NET-2006-05-13 (Network Economics)
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.:
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- Elizabeth Olmstead Teisberg, 1993. "Capital Investment Strategies under Uncertain Regulation," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 591-604, Winter.
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- Mandy David M. & Sharkey William W., 2003. "Dynamic Pricing and Investment from Static Proxy Models," Review of Network Economics, De Gruyter, vol. 2(4), pages 1-37, December.
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- Chisari, Omar O. & Kessides, Ioannis N., 2007. "The pricing dynamics of utilities with underdeveloped networks," Policy Research Working Paper Series 4198, The World Bank.
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