What level of competition intensity maximises investment in the wireless 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. The investment maximising intensity of competition is reached when operators' gross profits represent 37 or 40 per cent of their revenues, depending on whether capital expenditures are normalised by the number of subscribers. This finding means that investment increases with competition as long as operators' profits are above the thresholds of 37 or 40 per cent of their revenues. Under these thresholds, there is a tradeoff between competition and investment. The paper also finds a significant long run effect of competition on investment which amplifies the short run effect by a factor of 3–4.