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Downstream market structure and the incentive for innovation in telecommunication infrastructure

  • Nina Czernich
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    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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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-Ifo_Working_Papers/wp-ifo-2005-2010/IfoWorkingPaper-64.pdf
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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.

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    Date of creation: 2008
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    Handle: RePEc:ces:ifowps:_64
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    1. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
    2. Kamien, Morton I & Tauman, Yair, 1986. "Fees versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 471-91, August.
    3. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
    4. Kamien, Morton I & Tauman, Yair, 2002. "Patent Licensing: The Inside Story," Manchester School, University of Manchester, vol. 70(1), pages 7-15, January.
    5. 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.
    6. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
    7. Katz, Michael L & Shapiro, Carl, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 567-89, August.
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