In more recent years, regulatory authorities in the European
telecommunications sector have favoured the “ladder of investment” approach
proposed by Martin Cave (2006). This can be defined as a regulatory approach on one-way access, which ensures that
service-based entry and facility-based entry are complements in promoting
competition (Bourreau, Doan and Manant, 2010). As previously mentioned,
once entrants rely on the incumbents infrastructure to provide their services
due to access regulation, there is no longer incentive for them to build
alternative infrastructure (Bourreau, Doan and Manant, 2010). Martin Cave
proposed the ladder of investment (LOI) regulatory approach to the European
commission in 2001 with the intention of tackling this issue.

 

The idea behind the LOI approach was to allow potential
entrants different levels of access to the incumbents network. Initially a firm
would acquire access at a level that requires little investment to provide
their services (Bourreau, Doan and Manant, 2010). As the entrant begins to
develop and grow, in order to be granted the next level of access they must
invest in a pre-determined amount of network elements. This allows them to
climb up the investment ladder and acquire access to the next level. The
European Telecommunications Network Operators (ETNO), have challenged the LOI
approach arguing that it lacks empirical evidence and actually delays
investment by new entrants.

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The LOI approach has generally been discussed in terms of
asymmetric markets where the infrastructure is owned and controlled by the
incumbent. In this paper we will focus more on telecommunications as a
symmetric market where both the incumbent and the entrant have the opportunity
to be the first mover in new access infrastructure. The LOI approach can still
be applied in this context and this will be discussed in a later section
_________.

 

Some Concluding
remarks

The issue of incentivising innovation without reducing
competition is a reoccurring theme. Despite the different approaches attempted
by European regulators none have effectively solved this issue. Local loop
unbundling allowed for increased competition and in an industry where the
infrastructure cost is extremely high the importance of access regulation
cannot be undermined; however, while it achieves the short-term goal of increasing
consumer choice, it ignores the long-term welfare gains that consumers would
experience if firms undertook more investment and innovation.  The LOI approach was a step in the right
direction as it acknowledged the flaws of policymakers approach, however, in
its rawest form it only incentivised investment from new entrants who are the
smallest firms in the industry and the least likely to invest in new
technologies such as next generation access networks. It also fails to address
incumbent’s lack of investment incentives approaching telecommunications as an
asymmetric market.

 

Section 3

In this section we will use game theory to analyse the
incentives of both incumbents and entrants to invest in next generation access
networks under access regulation. This will help give a potential explanation
as to why previous EU regulatory polices have been ineffective and find ways
that they can be improved. We find that access regulation where MC