Infrastructure Quality in Deregulated Industries: Is There an Underinvestment Problem?

Stefan Buehler, University of St. Gallen
Armin Schmutzler, University of Zurich
Men-Andri Benz

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 counterexamples. 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.