Infrastructure quality in deregulated industries: is there an underinvestment problem?

We investigate how various institutional settings affect a network provider's incentives to invest in infrastructure quality. Under reasonable assumptions on demand, investment incentives turn out to be smaller under vertical separation than under vertical integration, though we also provide counterexamples. The introduction of downstream competition for the market can sometimes improve incentives. With suitable non-linear access prices investment incentives under separation become identical to those under integration. (C) 2003 Elsevier B.V. All rights reserved.