Exclusion and regulatory intervention in investment sharing agreements

Abstract

An incumbent and an other licensed operator may jointly invest to develop fiber network infrastructure while an outsider operator invests to develop cable network infrastructure. Regardless whether the investment sharing agreement occurs, market exclusion of the facility-based outsider does not hold. Considering the prevalence of the investment sharing agreement, it is not necessarily true that each insider contributes with an investment share of 50% since there may exist a trade-off between bargaining power and investment participation. Although full integration avoids duplication of investment costs, social welfare may be higher under partial integration. Presuming the increasing run for fiber, the framework proposes the inclusion of a fourth service-based operator that requires access to the fiber network infrastructure held by the consortium. This may define a tight oligopoly with simultaneous presence of investment sharing agreement. The service-based outsider is excluded from the retail market when the wholesale access price is unregulated. Subsequently, market exclusion depends on the competitive nature of the outsider firm. Finally, the framework reveals the conditions that legitimize ex-post regulation of the wholesale access price of fiber. An asymmetric regulatory intervention at the wholesale access price level is justified as a means of improving social welfare if the investment effort is excessively high. The same applies if the investment effort is intermediate, provided that an excessively high gap exists between the vertical spillover that affects the fiber consortium in relation to the vertical spillover that affects the cable operator.