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Abstract

Efficiency Trade-Offs in the Design of Competition Policy for the Telecommunications Industry

The Review of Network Economics

Vol. 6, Issue 3 - September 2007, pp 321 - 341


Authors
  Philip G. Gayle
Department of Economics, Kansas State University
E-mail: [email protected]

Dennis L. Weisman
Department of Economics, Kansas State University

Abstract
  Trade-offs between imitation and innovation create natural tensions in the design of competition policy for the telecommunications industry. We explore the relationship between the prices of unbundled network elements (UNEs) and static/dynamic efficiency. We find that even when UNEs are priced to induce efficient make-or-buy decisions from a static perspective, mandatory unbundling reduces the incumbent's incentive to invest from a dynamic perspective. Moreover, while the literature focuses on disincentives for investment in innovation associated with low UNE prices, we find that raising prices for UNEs, when such prices preserve the efficient make-or-buy decision, can discourage investment in process innovation.

Keywords: Telecommunications; Build-or-Buy Decision; Innovation.
JEL Codes: L43; L51.

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