in a repeated game, they have experience in the impact of investments on these variables,
they know their competitors and, due to legal obligations and sunk investment costs,
they know that their competitors will remain the same in the future. Since an investor
is able to extract higher rents due to its current market share and its customers’ calling
behavior (without gaining market shares in the short-run) and since competitors lose
only little by reducing termination rates we probably observe a tit-for-tat game among
the MNPs. Therefore, providers refrain from increasing their wholesale prices expecting
competitors to do the same. Additionally, taking into account multi-market activities
providers probably compete tougher where it is more profitable and spare themselves
where they gain less.
In a nutshell, the consideration of wholesale profits provides more insight into the change
in the wholesale price-cost margin and the change in quantities due to investments. By
adopting the estimation results to the theoretical model we find a positive own-profit
effect as investments increase the investor’s wholesale price-cost margin and the incoming
traffic. On the other hand we cannot identify a positive effect on competitors’ profits.
Moreover, the investment effect on competitors’ profits is close to zero as the (direct and
the indirect) investment effect on traffic compensates for the termination rate reduction.
6 Concluding Remarks and Limitations
Investments in competing networks is an ongoing issue in network-based markets because
of mainly two reasons: First, investments are implemented to increase the investor’s mar-
ket share and, thus, particularly revenue. Nevertheless, the service provided depends
on the users what means that a provider is ceteris paribus attractive only because of
a larger customer base. Second, investments directly affect the traffic to competitors’
networks. On the one hand (retail and wholesale) prices are altered and on the other
hand off-net traffic changes. In this paper I wanted to provide more insight into these
two aspects of investments in mobile infrastructure under the alternative European reg-
ulation schemes.
Starting with a theoretical model, I show that under a linear pricing scheme invest-
ments should increase both own and competitors’ short-run wholesale profits from traf-
fic between the investor and any competitor. I extend the analysis to non-linear retail
pricing and find mainly similar results. Afterwards, I compare the outcomes to the
usual cost-based and incentive regulation approaches known from the literature: While
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