Financial Considerations and Technology Investment Patterns in a Network Industry

Abstract

In this study, based on the reasoning that financial considerations in influence investment patterns within the context of a network industry, we evaluate the effects of lower access prices and cross subsidization on investments in bandwidth-expanding technology by local exchange carriers in the United States. Lower access prices and greater cross subsidization augment cash flow, and the availability of financial resources can be an important determinant of firms' investment strategies. We examine investments by firms in ISDN technology, the initial technology that enabled the communications sector firms we study to increase bandwidth and provide for greater access to the Internet for customers. Using recent five years' data, we identify access prices and cross subsidization as playing a key role in significant influencing investment in this new technology.

Keywords: Broadband investment, cash flow, network industries, access prices, cross subsidization, telecommunications firms, finance and investment

JEL Classification: D21, G31, G38, L96, O33, L51