Incentives to invest in telecommunications networks

Overview & Synopsis

This thesis presents four research papers studying the relationship between market structure, competition, regulation and investment in telecommunications networks. Telecommunications networks require regular and substantial investments. These investments are essential to incorporate the technical progress in the network and have a large impact on growth and employment. This is why the issue of investment incentives is especially important. The first paper examines the relationship between regulation (price of the access charge to legacy network, copper wholesale access share) and penetration of different technologies (copper, optical fiber and cable). It shows that a regulation which is too favorable to copper, decreases incentives to invest in other technologies and may slow down their development , especially the new generation technologies. The second paper examines the relationship between investment in mobile telephony and the average prices of the traffic (in megabytes). It shows that traffic growth depends on investments and technical progress. Regular investment yields an exponential growth of traffic. It also shows that the fall in average prices of the megabyte is mainly due to traffic growth and therefore investment. The third paper examines the relationship between margin and investment of mobile telephony operators. It shows a break in operators behavior based on their level of profit margin. It also shows that there is a level of investment that maximizes profit. This level of investment depends on the structure of the market and consumers’ demand. When the margin of the operator is sufficient, the level of investment to maximize profit is reached, otherwise, the investment is lower which slows down the incorporation of technical progress in the network, traffic growth and ultimately the fall in megabyte prices to the detriment of consumers. The fourth paper empirically examines precisely the relationship between the rate of margin (margin/revenues) and investment in mobile telephony. It highlights an inverted U-shaped relationship. The maximum investment is achieved for a 37.2% rate of margin. A theoretical model complements this study and shows that technical progress, that is to say, the response to the investment in terms of usefulness to consumers, plays an important role inshaping the relationship between the rate of margin and investment. When technical progress is weak, the relationship ismonotonic and decreasing. The likelihood of having an inverted U relationship increases with technological progress andwhen the relationship is inverted U, the peak of the curve shifts to higher rates of margin.