Access Regulation, Entry, and Investment 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 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. Without regulation, we find that the incumbent sets the access charge to
prevent resale based entry and this overstimulates rival’s investment that may turn out to be socially
inefficient. Access regulation may discourage welfare enhancing investments, thus also inducing a
socially inefficient outcome. We extend the model to account for negotiated interconnection in case of
facilities based entry.