But with competition, the ammount of revenue they could lose if they didn’t invest is enough to cover the costs of increasing capacity. With competition the opportunity cost of not investing is much higher.

Investing is cheaper than the opportunity cost of losing revenue to Telecom’s competitors.

What this tells me is that that the amount telecom believe they could charge consumers would not cover the costs of increasing capacity, therefore telecom hasn’t (and shouldn’t invest).

but with access regulation competitors can have a better service, therefore there is reason to invest in order to encourage customers to stay with Telecom rather than go to one of the unbundled competitors.

In this case Telecom doesn’t recieve any extra benefit from cabinetisation (if we had no LLU) but with LLU, customers can easily leave Telecom and reduce revenues. By cabinetising, it makes it harder for customers to leave Telecom (at least at the wholesale level) and it makes it harder for competitors to justify investment in new areas, (also making the customer stay with Telecom) thus the investment is worth it to decrease the ammount revenues are falling by.

Also in Telecommunications there are two types of investment, equipment and capacity. Telecom has invested in equipment which essentially reduces operating costs. This is what every telco is doing with moving to an all IP network – IP packets use less bandwidth so use less capacity. Separately Telecom has not invested in increasing capacity especially in certain bottlenecks where it faces limited competition because it recieves no extra benefit from it.

As a monopoly Telecom can maintain profits, lower costs with certain investments, but does not invest in increasing capacity because it doesn’t gain anything from it. However with Access Regulation Telecom faces competition on those bottlenecks (the access line to your home), and so is investing to keep customers on its network

It’s been a while since I’ve thought about this so hopefully I don’t contradict myself!

I’m curious whether you think that monopolies in general have little incentive to invest or if there is some special reason you think telecom would not invest?

I’m a bit short on time so haven’t had too much time to digest your comments but I interpreted you to be saying monopolies only invest for strategic reasons. ( I may be misinterpreting you, that’s the danger of thinking and writing on the fly!)

Accepting the fact that monopolies are greedy profit maximizers, would it not also be the case that if a monopoly could make an investment that profitably reduced cost or expanded demand they would do so?

I’m not saying monopolies don’t make strategic investments that screw potential competitors; I just think they can make investments whose only malicious purpose is increasing profit through an increase in the total surplus available.

Now we also have regulated access to the copper which is cost plus. It is a regulated rate which is the cost of installing the copper to your house in the first place plus a reasonable return on investment. This is the part where there may be a negative impact on investment. There is firstly a positive impact on investment because other providers install better equipment to provide better broadband than Telecom, and Telecom also upgrades its equipment to compete with other providers. We have now seen this happening in Auckland and will soon see it around the rest of the country. While Telecom has a monopoly on its copper network, and little incentive to improve it becuase there is no increase in revenue, there is an increase in revenue if it can make investments to keep the copper with Telecom itself, rather than its competitors. We have seen this with cabinetisation. Telecom is investing in cabinets, shortening the local loop because the business case for competitors to install equipment in a cabinet (serving 400 customers) is much more difficult than installing equipment in an exchange (serving 12,000 customers). Therefore Telecom knows by investing in cabinets they will face lessened competition.

True Access regulation has actually increased investment in both the access network and service equipment because it has removed the monopoly. There is little incentive to invest when it was a monopoly because there is little extra revenue to gain from investment. However now there is incentive to invest in order to protect their existing revenues.

Now as far as separation goes its about changing the incentives on Telecom so that Wholesale doesn’t try to screw competitors to Retail, and so that the Access Network unit doesn’t try to screw competitors to Retail and Wholesale. It should have a positive impact on investment because normal competitive pressures are in place. Without it competitors to Telecom have a lower level of service than Telecom, and cannot compete.

However, now the word is that the commision is going to directly set the access price. This solves some of the problems associated with the separation of telecom (namely potential double marginalisation, leading to higher prices), however it could lead to a lack of investment by Telecom, because of regulatory uncertainty and the fact that the marginal benifit for the firm is now lower, and they invest until MC=MB, where MC is increasing in investment, implying a lower level of investment.

So the main issue we are interested in, in this specific post is the one of investment. Can the commerce commision dream up a scheme where they can set a low price for access to the network, and at the same time provide incentives for the socially optimal amount of investment?

Ultimately, investments will be made if the increase in producer surplus (profits) exceeds the cost. Investment in most telecommunications services is to increase the worth of the service to consumers (demand) rather than decrease the cost to the company. In this case, a regulated price is crazy.