The name is absent

1 Introduction

Interconnection is an ongoing issue for competition and regulation authorities in network-
based markets. I address the topic of wholesale-price regulation and investments in Euro-
pean mobile telecommunication markets and analyze how investments affect termination
rates and off-net traffic. Following Article 8(2) of the Framework Directive (2002/21/EC)
"national regulatory authorities shall promote competition [...] by encouraging efficient
investment in infrastructure, and promoting innovation". Very recently, the European
Commission took up this topic again and proposed to implement long-run incremental
cost (LRIC) regulation in mobile voice call termination markets (Market 16 following
the latest market definition of the European Commission). LRIC regulation should par-
ticularly encourage investment incentives as all providers’ termination rates depend on
the most efficient infrastructure elements.

Nevertheless, the topic of investments with interconnected networks has, at least to my
knowledge, never been addressed in the empirical literature on network competition.
There is only little empirical evidence, focusing either on telecommunication markets as
a whole or on the effect of competition on investments.¹ Consequently, we only know
from theory how mobile network providers, i.e. network providers in markets with com-
parably low market concentration, should interact. With this paper I want to provide
more insight into the issue of investment spill-overs in mobile markets.

I focus on (transportation) cost-reducing/cost-efficiency-increasing infrastructure invest-
ments and analyze how regulation affects the impact of investments on mobile network
providers’ wholesale profits. While quality-increasing investments, as discussed in Foros
(2004), Kotakorpi (2006) or Valletti and Cambini (2005), induce a change in customers’
calling behavior cost-reducing investments address the supply side. Lower costs enable
a provider to offer "more" origination and termination service on its network as both
existing facilities can be used more efficiently and the challenge of bottlenecks is miti-
gated. Note that one cannot easily separate investments in quality from cost-reducing
investments. I concentrate on cost-reducing investments due to the measurable direct
effect of cost changes on changes in termination rates and draw links to the topic of
quality investments where it is possible.

If one provider invests in its network this should also affect termination rates, quan-
tities and thus profits of other providers. First, investments in cost-reduction lower

¹ Central exemptions are Roller and Waverman (2001) or also Grajek and Roller (2008).

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