Do internet incumbents choose low interconnection quality?

We analyze the interconnection incentives for two networks that differ with respect to the size of their installed bases. In the first part, we prove that the smaller firm may be harmed in competition for new customers if the installed base customers pay a high price. In the second part, we assume that the interconnection quality to customers in the installed bases is set before the interconnection quality to new customers. We show that both firms prefer perfect interconnection quality to new customers if the installed base interconnection quality is sufficiently high, and we discuss what policy implications this may have.