Competition through Technical Progress

This paper investigates the relationship between technical progress, competition, and the impact on consumer's surplus and welfare in the telecommunication industry. A Hotelling model in symmetrical duopoly with full market coverage is introduced. Firms invest in order to improve the quality of their offer and thus consumers' willingness to pay. When the potential for technological advancement is great enough, particularly in the case of information technologies and telecommunication industry, firms are encouraged to invest. Social welfare benefit is greatest and most likely to occur where potential for technological advancement is high, even if it provides no profit to firms. Technological advancement stimulates investment, however, it also requires investment capabilities and therefore enough profits. Thus, different rates of technical progress are both a result of and a cause for different investment rates.