Access regulation, entry and investments in telecommunications

This paper presents a model of competition between an incumbent and an entrant firm in telecommunications. The entrant has the option to enter the market with or without having preliminary invested in its own infrastructure; in case of facility based entry, the entrant has also the option to invest in the provision of enhanced services. In the case of resale based entry the entrant needs access to the incumbent network. Unlike the rival, the incumbent has always the option to upgrade the existing network to provide advanced services. We study the impact of access regulation on the type of entry and on firms’ investments. We find that without regulation the incumbent sets the access charge to prevent resale based entry and this generates a social inefficient level of facility based entry. Access regulation may discourage welfare enhancing investments, thus also inducing a socially inefficient outcome. We extend the model to account for negotiated interconnection in the case of facilities based entry.

► An incumbent and an entrant compete in the market for advanced communications services. ► The entrant may enter the market with its own infrastructure or by buying access from the incumbent. ► The incumbent and the facility based entrant may invest to provide advanced services. ► We analyze the type of entry with and without access regulation. ► We analyze the type of entry with cost based and with bilateral interconnection.