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| In summer 2005 the German telecommunication incumbent Deutsche Telekom announced its plans to build a new broadband fibre optics network. Deutsche Telekom decided as precondition for this new network not to be regulated with respect to pricing and third party access. To develop a regulator's strategy that allows investments and prevents monopolistic prices at the same time we model an incumbent's decision problem under a threat of regulation in a game-theoretical context. The decision whether to invest or not depends on the probability of regulation and its assumed impact on investment returns. Depending on the incumbent's expectation on these parameters he will decide if the investment is favourable and which price to best set. This price is below a non-regulated profit maximising price since the incumbent tries to circumvent regulation. Thus we show that the mere threat of a regulator's intervention might prevent supernormal profits without actual price regulation. The regulator on the other hand an influence both investment decision and the incumbent's price via his signals on regulation probability and price. These signals can be considered optimal if they simultaneously allow investment and minimize the incumbent's price. |
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