Vertical Product Differentiation, Network Competition and Regulation of Connectivity

In this paper competition between two network firms is analysed under two alternative regulatory regimes: a global connectivity regulation (GCR) and an efficient component pricing regulation (ECPRe). Whereas a GCR imposes a full quality of reciprocal interconnection, firms will choose vertical product differentiation in order to lower price competition, while under a ECPRe they will choose the maximum level of services quality and a global degradation of connectivity. Hence firms’ decisions about whether or not vertically differentiate products seems to be, at least partially, related to regulatory rules imposed on the market