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fect on termination rates the results raise the question whether regulation indeed affects
MNPs’ investment strategies. The theoretical model tells us that with no regulation
investments should have a positive effect on competitors’ termination rates due to a
higher demand for incoming traffic to a monopolistic network market. Even with reg-
ulation we should either observe no investment externality on competitors’ termination
rates (incentive regulation, standard cost-based regulation) or a negative effect (LRIC
regulation). This is why an under-investment problem is often identified in the literature
with regulation uncertainty or with network competition.

As competitors reduce their termination rates in line with another provider’s investments
independent of the existing regulation scheme this strategy must be in the competitors’
intention to make profits either in the short-run or the long-run. While I have no data on
long-run investment effects I will consider the short-run effect of investments on profits
in the extension below.

A number of control variables is included without developing explicit a-priori hypothe-
ses. Hence, the discussion of their estimation results is either based on the results of
other papers or which explorative in nature. We find a significant negative market
share coefficient for termination rates which is more or less in the range of Dewenter
and Haucap’s findings and a positive coefficient for the traffic equations. If the market
share of a provider is one percentage point higher its incoming traffic is between 0.93
percentage points (with the 3SLS approach) and about 1.24 percentage points (for the
direct investment estimation using OLS) higher. Note that these high coefficients are
probably mainly due to the way of constructing the dependent variable log(M OU inc.)
as this variable depends strongly on the MNP’s market share. Therefore, one should not
put too much weight on the log (market share) coefficient. Similarly, a highly significant
effect is found for the share of urban population.

In the discussion of a common regulation-investment effect I have ignored the alternative
types of regulation as control variables. Regulation has an ambiguous effect on termina-
tion rates and off-net traffic: While in cost-based regulated countries termination rates
are about 12.3 percentage points higher no significant effect of incentive regulation is
found. Following standard textbooks like Laffont and Tirole (2000) providers have no
incentive to reduce prices as such a reduction would only reduce costs but would not
change the price-cost margin. In contrast, in countries with incentive regulation off-net
traffic is significantly higher.

24



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