Is There a Level of Competition Intensity that Maximizes Investment in the Mobile Telecommunications Industry?

Abstract

This paper investigates the relationship between competition and investment in the wireless industry from a dynamic perspective. Using firm level data and instrumental variable estimation strategy, it finds that the relationship is inverted-U shaped, with an investment maximising intensity of competition at 60 or 63 percent, depending on whether capital expenditures are normalised by the number of subscribers. This finding means that investment increases with competition as long as wireless operators’ profits represent more than 37 or 40 percent of their total revenue. Below these thresholds, there is a tradeoff between competition and investment. Moreover, there is a significant long run effect of competition on investment in the wireless industry. The magnitude of the long run effect is 3 or 4 times the short run effect.