The name is absent

Investment externalities

The effect of i’s investments on own outgoing traffic depends on i’s relative market share.
Competitors’ termination rates are stronger affected by larger providers’ investments as
origination costs enter competitors’ termination rates weighted by the market share (see
(3)). Thus, competitors choose termination rates to be higher the higher the market
share of the investor and the stronger the investment effect on origination costs due to
the increase in incoming traffic:

While the impact of investments on incoming calling minutes to the investor is straight
forward, the effect on incoming minutes to competitors’ networks,    _j q_i,j =

sib1 Pj s/i-bp,j, is ambiguous. With higher wholesale prices for termination the in-
vestor chooses higher retail prices for outgoing calls. On the other hand the efficiency
increase reduces origination costs. The total effect therefore depends on whether the ef-
ficiency increase outweighs the effect on competitors’ termination rates or not. Deriving
prices for outgoing calls from the investor’s network pi,j with respect to ki yields:

∂pi,j _   C_i(ki ) si bi ^{- 2} Р-j- s-j b-j

∂ki =     2     2 P_-j s-jb-j

which is negative as the second term is strictly negative (given the assumption of suffi-
ciently low market concentration). Even though competitors’ termination rates increase
in i’s investment the investor does not pass on this termination rate increase to cus-
tomers. Moreover, the cost-reduction overcompensates the investment effect on com-
petitors’ termination rates.

As competitors’ costs of call termination on their own network remain unchanged by i’s
investment competitors’ wholesale mark up increases. Additionally, the total duration of
incoming calls from the investor’s network increases as off-net calls from i are positively
affected by i’s investment in cost-reduction. Combining these findings the investment
externality on competitors’ wholesale profits is positive:

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