Strategic investments with spillovers, vertical integration and foreclosure in the broadband access market

We analyse competition between two retailers of broadband access when they differ in their ability to offer value-added services. One retailer is vertically integrated and controls the input-market for local access. This firm invests to increase the input quality (upgrading to broadband) before an access price regulation is set. We first show that access price regulation may lower consumer surplus and welfare if retailers do not differ too much. Second, if the integrated firm's ability to offer value-added services is much higher than that of the rival, the integrated firm uses overinvestment as an alternative foreclosure tool. (C) 2003 Elsevier B.V. All rights reserved.