DP3836 Infrastructure Quality in Deregulated Industries: Is there an Underinvestment Problem?

Author(s): Men-Andri Benz, Stefan Bühler, Armin Schmutzler
Publication Date: March 2003
Keyword(s): investment incentives, networks, quality, vertical externality
JEL(s): D42, L22, L43
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3836

We investigate how various institutional settings affect a network provider?s incentives to invest in infrastructure quality. Under reasonable assumptions on demand, investment incentives turn out to be smaller under vertical separation than under vertical integration, though we also provide counter-examples. The introduction of downstream competition for the market can sometimes improve incentives. With suitable non-linear access prices investment incentives under separation become identical to those under integration.