Network investment and the threat of regulation: avoiding monopoly or infrastructure extension
In summer 2005, Deutsche Telekom announced its plans for the buildup of a new fiber glass network. At the same time, it formulated the condition that this network was not to be regulated concerning pricing or use by other providers (network access). In order to make this investment possible, in its coalition treaty the big coalition agreed to exclude the new network from the ex-ante regulation and to include this freedom from regulation in the telecommunication law. The question is now how investments can be facilitated and, at the same time, welfare losses through monopoly gains can be avoided. Applying game theory, it can be shown that a regulation authority like the ‘Bundesnetzagentur’, which is responsible for German telecommunication sector, should signal an increasing tolerance for deviations from its calculated and determined regulatory price in the face of increasing uncertainty concerning expected cost and returns. Thus, the threat of regulation alone leads to tolerable prices, without the actual regulation taking place. In the future, the ‘Bundesnetzagentur’ should reduce information asymmetries and the optimal level of tolerance in order to achieve a more precise intervention price and a more effective threat of regulation. The effectiveness of such a threat decreases if the legislation prevents the regulation authority from using this instrument by law. Against this background, the recent Federal Government resolution from March 17th 2006 noveling the telecommunication law heads for the economically right direction but it has to prove its incentive compatibility in the daily legal practice.