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Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction

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  • João Vareda

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    (Autoridade da Concorrência)

Abstract

We study the investment of a telecommunications incumbent in quality and in cost reduction when an entrant can use its network through unbundling of the local loop. We fi?nd that unbundling may lower incentives for quality improvements, but raises incentives for cost reduction. Therefore, it is not true that all types of investment are crowded out with unbundling. If the regulator can commit to a socially optimal unbundling price before investment, the incumbent makes both types of investment. In the absence of commitment, the incumbent will not invest, so that unbundling regulation may lower welfare as compared to no regulation.

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Bibliographic Info

Paper provided by Portuguese Competition Authority in its series Working Papers with number 31.

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Date of creation: Nov 2007
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Handle: RePEc:pca:wpaper:31

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Keywords: Access Pricing; Telecommunications Regulation; Unbundling; Investments; Quality upgrades; Cost reduction; Commitment;

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References

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  1. João Vareda & Steffen Hoernig, 2007. "The race for telecoms infrastructure investment with bypass: Can access regulation achieve the first best?," Working Papers 29, Portuguese Competition Authority.
  2. Chang, Hsihui & Koski, Heli & Majumdar, Sumit K., 0. "Regulation and investment behaviour in the telecommunications sector: policies and patterns in US and Europe," Telecommunications Policy, Elsevier, vol. 27(10-11), pages 677-699, November.
  3. Biglaiser, Gary & Ma, Ching-To Albert, 1999. "Investment Incentives of a Regulated Dominant Firm," Journal of Regulatory Economics, Springer, vol. 16(3), pages 215-35, November.
  4. Valletti, Tommaso M., 0. "The theory of access pricing and its linkage with investment incentives," Telecommunications Policy, Elsevier, vol. 27(10-11), pages 659-675, November.
  5. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, December.
  6. Cabral, Luis M B & Riordan, Michael H, 1989. "Incentives for Cost Reduction under Price Cap Regulation," Journal of Regulatory Economics, Springer, vol. 1(2), pages 93-102, June.
  7. Bijl, P.W.J. de & Peitz, M., 2004. "Unbundling the Local Loop: One-Way Access and Imperfect Competition," Discussion Paper 2004-025, Tilburg University, Tilburg Law and Economic Center.
  8. Foros, Oystein, 2004. "Strategic investments with spillovers, vertical integration and foreclosure in the broadband access market," International Journal of Industrial Organization, Elsevier, vol. 22(1), pages 1-24, January.
  9. M. Bourreau & P. Dogan, . "Unbundling the Local Loop," Working Paper 33648, Harvard University OpenScholar.
  10. Cambini, Carlo & Valletti, Tommaso M., 2004. "Access charges and quality choice in competing networks," Information Economics and Policy, Elsevier, vol. 16(3), pages 391-409, September.
  11. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-14, May.
  12. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
  13. Kotakorpi, Kaisa, 2006. "Access price regulation, investment and entry in telecommunications," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 1013-1020, September.
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Citations

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Cited by:
  1. Vareda, João, 2007. "Access Regulation under Asymmetric Information about Demand," FEUNL Working Paper Series wp525, Universidade Nova de Lisboa, Faculdade de Economia.
  2. Bourreau, Marc & Dogan, Pinar, 2010. "Level of Access and Competition in Broadband Markets," Scholarly Articles 4454152, Harvard Kennedy School of Government.
  3. Duarte Brito & Pedro Pereira & João Vareda, 2008. "Incentives to Invest and to Give Access to Non-Regulated Next Generation Networks," Working Papers 08-10, NET Institute, revised Oct 2008.
  4. Michiel Bijlsma & Viktoria Kocsis & Victoria Shestalova & Gijsbert Zwart, 2008. "Vertical foreclosure: a policy framework," CPB Document 157, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Haucap, Justus & Klein, Gordon J., 2012. "How regulation affects network and service quality in related markets," Economics Letters, Elsevier, vol. 117(2), pages 521-524.
  6. Okamoto, Yoshikazu & Nakamura, Akihiro, 2013. "The influence of local loop unbundling on investment by incumbent telecommunications operators in the OECD member countries," 24th European Regional ITS Conference, Florence 2013 88499, International Telecommunications Society (ITS).
  7. Pachis, Athanasios & Yannelis, Demetrius, 2013. "The relation between local loop unbundling and investment in fixed telephony," 24th European Regional ITS Conference, Florence 2013 88470, International Telecommunications Society (ITS).
  8. Benjamin Pakula & Georg Götz, 2011. "Organisational Structures in Network Industries – An Application to the Railway Industry," MAGKS Papers on Economics 201109, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  9. Lars-Hendrik Röller, 2009. "Auswirkungen von Regulierung auf das Investitionsverhalten in Netzindustrien: Die europäische Telekommunikationsindustrie," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 62(10), pages 12-15, 05.

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