Strategic investments with spillovers, vertical integration and foreclosure in the broadband access market

Abstract

We analyse competition between two firms (ISPs) in the retail market for broadband access. One of the firms is vertically integrated and controls the input market for local access. The vertically integrated firm undertakes an investment that increases the quality of the input (upgrading to broadband). The retailers’ ability to offer valueadded services when the input quality is improved differs. We analyse the effect of an access price regulation that is set after the investment. The access price regulation may have negative effects on investment incentives, and we show that the total effect on consumer surplus and welfare depends on which firm has the highest ability to offer value-added services.