The name is absent

In what follows two alternative investment effects are compared:⁵ The own investment
effect represents the effect of investments on the investor’s profits from off-net traffic.
As the demand for off-net calls depends on off-net retail prices cost-reducing investments
affect the investors off-net profits both through wholesale and retail prices and through
the quantity of incoming and outgoing calls.

With the term investment externalities the impact of one provider’s investment on
another provider’s off-net profits from interconnection with the investor is described.

Notational note: In the following the investing network is indexed by i and -i is used
for all networks except for i and -j for all networks except for j 6= i.

Own investment effect

Deriving (3) with respect to ki yields the change in the termination rate for incoming
calls on network i:

^dti = ^ci(ki) < 0

∂ki      2

As expected for monopoly prices, the termination rate decreases by cost-reduction.

Moreover, the cost-reduction is only partially passed on to customers. From (2) we
know that the effect of investments on the off-net price p_j,_i is 2t⁰_i(k_i). The investment
increases the amount of traffic from network j to network i because the impact on off-net
prices is strictly negative.

With lower termination rates a positive effect of investments on own wholesale profits is

observed as, first, termination rates decrease less severely than costs and as, second, pj_,i
for any MNP j also decreases due to the reduction in termination costs:

The term in brackets is non-negative for both the linear and the two-part tariff model
as we will see below.

The calculation of retail profits from the investor’s outgoing calls is provided in appendix
A.3.

⁵ In appendix A.1 a third investment effect will be discussed which has been ignored in the literature
due to the standard assumption of only two competing networks.

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