Product quality investment co-operation and sharing among downstream rivals: An application to mobile telecommunications

We analyze incentives for cooperation on product quality investments and sharing of quality improvements in a Hotelling duopoly. In the standard set up, an identical increase in quality by both firms does not affect demand, since demand elasticity is unaffected. If product quality investments make demand more inelastic, firms’ incentives for investments and sharing may be significantly altered. However, if the impact on demand elasticity is not too strong, a ban on cooperation on product quality investments as well as sharing is welfare improving. Our motivation is 5G investments within mobile telecommunications, where cooperation on investments as well as network sharing is a topical issue.