Vertical separation and network investment in telecommunications

When the access network is an enduring economic bottleneck, vertical separation of the telecommunications incumbent may be an effective and proportionate remedy. There is the presumption that separation would reduce quality-enhancing network investment. We show that, despite efficiency losses of vertical disintegration, mandatory separation improves quality investment and welfare provided that the demand-side investment spillover, or the rival firm’s (perceived) service quality is sufficiently high. We find that separation mostly encourages investment when the integrated firm provides downstream competitors with low-quality access. The results shed light on the effect of separation on the incentive to deploy Next Generation Access Networks.