Market structure and the incentive to invest in telecommunication infrastructure

This paper addresses the question of how the competitive situation in a downstream market, the services, influences the innovative activity in an upstream market, the network infrastructure. To attend to the two-level-structure of the market presented above, the structure of the model follows models from the patent licensing literature. To adapt to the telecommunication sector this paper considers an integrated network provider that developed a new technology which reduces the production costs of the service providers. To permit the service providers to use the technology he can charge an access fee. It can be shown that the network provider’s profit increases with the number of competitors given the access charge is sufficiently high. The effect persists even if the access charge is set lower than the network supplier would set it. Hence it exists a range of the access charge where increasing competition in the service market yields more innovative investment in the network infrastructure. JEL Code: L96, O31, L42, L24