A critical review of the “ladder of investment” approach

Abstract

The "ladder of investment" is a regulatory approach proposed by Martin Cave (2006), which has been widely embraced by national regulatory authorities in the European telecommunications sector. The approach entails providing entrants, successively, with different levels of access -the "rungs" of the investment ladder, while inducing them to climb the ladder by setting an access charge that increases over time or by withdrawing access obligations after some pre-determined date (i.e., by setting sunset clauses). Proponents of the ladder of investment approach claim that such regulatory measures would make service-based entry and facility-based entry complementsalbeit they have been traditionally viewed as substitutes-in promoting competition. The regulators, thus, have shown a strong interest in this approach. In this paper, we provide a critical review of the ladder of investment approach by setting out its two underlying assumptions and discussing their validity with references to the related industrial organization literature.

Which access to which assets for an effective liberalization of the railway sector?

“…According to this approach, infrastructure-based competition is only possible at a second stage, when the market share of the new entrants is sufficiently developed to make the funding of their investments possible. Entering the market through the services segment may help the new competitors ''to invest in experience before investing in their own physical infrastructures'' (Bourreau et al, 2010). There are two main advantages to this progressive entry.…”

“…However, this regulatory remedy has potential negative side-effects. If access prices are too low and if the access is seen as permanent by the market players, investing in its own infrastructures may represent a significant opportunity cost for new entrants (Bourreau et al, 2010). A new entrant may be deterred from investing in its own capacities as it involves a cost without any immediate benefit (see the replacement effect as described by Vogelsang (2012)).…”

“…Following Bourreau et al (2010), three issues need to be considered in terms of regulatory management. The first issue is related to information.…”

Symmetric Telecom Regulation, Competition and Investment

“…The experiences with operators climbing up a LoI have generally not lived up to expectations, and the theory has been subject to much criticism (e.g. Bourreau et al, 2010). It has been pointed out that it may be that service competition leads to a faster take-up (penetration) of services, at least in the beginning, but infrastructure competition will in the end lead to better coverage and, therefore, more solid competition (Yoo, 2014).…”

Modeling the regulatory intervention in the telecommunications market

“…Therefore, as Bourreau, Doğan and Manant (2010) point out, a phase of servicebased competition may be a necessary, but not a sufficient, condition to ensure that it will serve as a stepping stone to facilities-based entry if the replacement effect is neutralized. The authors also challenge another assumption of the ladder-of-investment theory which states that the regulator has the instrument to neutralize the replacement effect.…”