The name is absent

In a nutshell, regulation is expected to introduce a deterrence to investment effects as
it fixes price components either to a cost-based level or to an exogenously given price
basket. Thus, under cost-based regulation the investment effect on competitors’ prices
is larger whereas the effect on the investor’s prices remains equal to that of the situation
without regulation. With the incentive regulation the own retail price effect is equal to
the situation without regulation but no effect on competitors’ prices exists anymore.

3.5 Discussion of the theoretical model

As a potential equilibrium situation cannot be analyzed with the data I only consider
the impact of investments on own wholesale profits and the externality on competitors’
wholesale profits in the short-run. Thus, I do not fully specify the theoretical model in
the sense that I only analyze off-net traffic and ignore on-net effects of investments and
the substitutability between on-net and off-net calls.¹⁰ Second, I use comparative statics
to analyze the impact of investments and do not further discuss investment costs. In
consequence, the strategic investment behavior as it is discussed in Valletti and Cambini
(2005) is ignored here. In doing so I mainly refrain from the analysis of size effects in
terms of market shares and ignore customers’ provider choice.

Even with these limitations the theoretical model provides two central results concerning
the impact of investments on termination rates and off-net traffic. From the own invest-
ment effect analysis investments should reduce own termination rates, thus, increasing
the demand for calls to the investor both assuming either regulation or the absence of
regulation. Note that the demand increase is only induced by the termination rate re-
duction. Thus, the cost-reduction is only partially passed on to customers with both a
linear and a two-part tariff pricing structure.

H1 (Own investment effect): Investments reduce own termination rates but affect
incoming traffic only through the investor’s termination rate choice.

After the analysis of the own investment effects we turned to the effect of investments on
competitors’ termination rates and competitors’ incoming calls. The demand for outgo-
ing calls, i.e. the total incoming calls to competitors, increases in line with cost-reducing
investments, as the cost-reduction results in lower retail off-net prices from the investor’s
network. Due to this demand increase competitors are able to ask for higher termination

¹⁰ The on-net/off-net price differential problematic was, to my knowledge, first introduced in A-LRT
and is the subject of Hoernig (2007).

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