Working Paper: CEPR ID: DP3836
Authors: Menandri Benz; Stefan Buehler; Armin Schmutzler
Abstract: We investigate how various institutional settings affect a network provider?s incentives to invest in infrastructure quality. Under reasonable assumptions on demand, investment incentives turn out to be smaller under vertical separation than under vertical integration, though we also provide counter-examples. The introduction of downstream competition for the market can sometimes improve incentives. With suitable non-linear access prices investment incentives under separation become identical to those under integration.
Keywords: investment incentives; networks; quality; vertical externality
JEL Codes: D42; L22; L43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| vertical separation (L22) | smaller investment incentives (G31) |
| vertical integration (L22) | larger investment incentives (G31) |
| downstream competition (L19) | ambiguous effects on quality investment incentives (H32) |
| nonlinear access prices (D49) | investment incentives align with integration (F15) |