Supply and Demand for Telecommunication Infrastructure

Telecommunication infrastructure availability at an adequate quality level has considerably changed communication habits since the 1990s. The physical infrastructure and its quality are the key pre-requisites for higher-level service infrastructure (such as the internet) or offered services (such as SMS or telephony). Consequently, telecommunication infrastructure, investment incentives and the effect of service level competition have gained importance in economic research. Although new technologies demand an active usage of infrastructure by customers offering own information and services (Web 2.0), only a low number of infrastructure providers shoulder investment costs and investment risks. Therefore, it becomes more and more difficult for infrastructure providers to internalize the value added for customers by the provision of a high-quality infrastructure. This paper analyzes whether and how the demand for infrastructure affects infrastructure provision. So far, the empirical literature assumes investments to be only driven by supply side characteristics. Thus, service level competition is considered as a direct driver for infrastructure provision. However, it is ignored that service competition increases information supply which requires an adequate level of infrastructure. Consequently, service competition should also have an impact on infrastructure demand and, thus, should indirectly affect infrastructure investments. In a two-equation model, I disentangle service competition as a driver for infrastructure demand and as a driver for infrastructure supply and compare the results of the simultaneous estimation approach with the standard closed-form approach, i.e. when the indirect effect of competition is ignored. I do this exercise both for fix-line infrastructure and for mobile infrastructure and show that the impact of competition on investments is downward-biased when the demand side is ignored. Moreover, I also analyze cross-effects between fix-line and mobile infrastructures. While the demand for fix-line infrastructure is found to be independent of the demand for mobile infrastructure, the demand for mobile infrastructure depends on fix-line infrastructure demand. Similarly, mobile investments depend on fix-line investments but fix-line investments are found to be independent. While fix-line infrastructure is installed at a point in time without a competitive infrastructure being already in place, mobile supply and also mobile demand depend on the fix-line market situation. These findings support the idea of asymmetric substitutability effects between competitive infrastructures in European telecommunication markets.

Veith, Tobias (2010), Supply and Demand for Telecommunication Infrastructure, ZEW Discussion Paper No. 10-087, Mannheim.